Blue Skies for JetBlue

09/26/2003 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

One approach used by the analysts at Schaeffer's Investment Research is a contrarian system known as Expectational Analysis, which gauges investor expectations through sentiment indicators. Here's an overview of the approach and its application to JetBlue.

"A stock with relatively low expectations stands a good chance of rallying," says Bernie Schaeffer. "Conversely, high expectations can put downward pressure on a stock as the price adjusts itself lower from its unrealistic heights to better match reality. Put another way, low expectations translate into potential buying power as skeptical investors (and their money) wait on the sidelines, ready to bolster a stock by buying up the supply from profit-takers. This excess demand drives the price even higher. On the other hand, high expectations usually mean that most of the sideline money has already been committed to a stock. Buyers are now scarce, and selling will predominate on any perceived negative news, resulting in a price decline.

One stock with low expectations among speculators and analysts is JetBlue Airways (JBLU NASDAQ). Analyst Beth Gaston explains: "JetBlue is the best of both worlds - a low-priced airline that offers its passengers both leather seats and DirecTV access. JBLU has two hubs, at JFK airport in New York and at Long Beach Airport near Los Angeles. The airline currently boasts around 40 aircraft and serves 20 U.S. cities and Puerto Rico. It was also just reported that JBLU will join the S&P Midcap 400 Index; this news lifted JBLU shares back above their 10-day moving average. The stock has also achieved a new all-time high. Since mid-March, the stock has been rallying strongly, increasing by more than 150% during the past six months. Throughout this rally, JBLU has enjoyed nearly constant support from its ascending 10-day and 20-day moving averages.

"Despite the equity's technical prowess, there are creeping signs of pessimistic sentiment on the security. First, Schaeffer's put/call open interest ratio for JBLU has been on the rise since mid-July. The bulk of the call positions reside at in-the-money strikes, meaning that JBLU should not face any options-related resistance in its path over the short term. Secondly, there are currently around seven million JBLU shares sold short. When compared to the equity's average daily volume, this represents a short-interest ratio of 8.13 times, also known as eight days to cover. If JBLU continues to rally through new high territory, these bearish speculators may rush to cover their positions, boosting the stock even higher in the process. Finally, Wall Street analysts have yet to start a love affair with JBLU. According to Zacks, there are only eight brokerage firms that currently cover the stock - just two of whom name it a 'buy.' The remaining six analysts have listed JBLU as a ‘hold.’ Any additional coverage from the Street, or any upgrades from this noncommittal bunch, could also provide fuel for the equity's rally."

Related Articles on