Video Views: Games and Rentals

08/19/2005 12:00 am EST

Focus:

Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

The Equity Scorecard ranking system, from Schaeffer's Investment Research, uses ten sentiment, technical, and fundamental indicators to assess a stock's future performance. Here, analyst Beth Gaston Moon looks at two high-ranking video plays.

"Midway Games (MWY NYSE) develops and publishes entertainment software for a variety of platforms, including personal computers, PlayStation, Xbox, and GameCube. Some of the company's titles include Mortal Kombat and Area 51. The stock has enjoyed an impressive rally off its mid-May bottom, gaining 75% in value over the past three months and bounding higher off steady support from its ten-day and 20-day moving averages. In similarly impressive fashion, MWY shares recently managed to overtake potential triple-top resistance at the 13 level, which capped the stock's progress in June and August of last year. MWY is now within striking distance of reaching a new three-year high.

"While the stock has been flourishing, options players have engaged in a little Mortal Kombat of their own, risking life and limb to maintain bearishly-skewed positions. Last Tuesday, the stock's Schaeffer's put/call open interest ratio (SOIR) reached a new annual high of 1.02. While the indicator has since stepped back moderately, to 0.77, it remains higher than 77% of the past year's readings, suggesting continued pessimism from the speculative crowd. In a similar vein, the stock's short-interest measure has begun to decline, but serious pessimism lingers. A 12% drop in shorts last month left 2.8 million shorted MWY shares, or 16% of the security's float.

"What's more, the short-interest ratio still weighs in at nearly seven days to cover, providing additional short-covering support, which may help fuel a continued rally in the stock. Finally, MWY stands to benefit from the possibility of upgrades, as not a single Wall Street analyst has managed a bullish commitment to the security. Only four brokerages even follow MWY, all of whom name the stock a 'hold.' Any additional coverage, or shifts to the 'buy' side, would likely spark additional buying power.

"We are bullish on Netflix (NFLX NASDAQ), one of the largest by-mail DVD rental service. The 35 NFLX shipping centers nationwide enable nearly 90% of the service's three-million-plus subscribers to receive one-day turnaround service. I personally use the service and certainly can't complain about the speedy service that Netflix has offered my household. Nevertheless, options players continue to stack their bets against the stock. This sentiment indicator has been rising sharply since June and currently stands at 1.06, with puts narrowly exceeding calls in the front three-months' series. This reading is in the 90th percentile, just ten meager percentage points away from notching a new annual peak.

"Additionally, the equity's short-interest ratio stands at 15 days to cover, its highest reading since September 2002. In other words, bearish players would require roughly three weeks of trading (at the stock's average daily volume) in order to eradicate all of their shorted positions. This, (and the fact that almost 40% of the available float is sold short), provides plenty of grist for the short-covering mill. Analysts don't have too many NFLX shares in their queue either. NFLX has gleaned four (generally rare) 'strong sell' recommendations, along with one regular 'sell.' Seven 'hold' ratings and only four 'buys' round out the picture, leaving ample room for future upgrades.

"All of this skepticism is swirling about NFLX even while the stock is at a new annual high. From a long-term perspective, things are looking up for the security, which has catapulted above its 20-month moving average for the first time since its July 2004 pullback. And its ten-month moving average has rolled into an uptrend, which could be a good harbinger for the shares."

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