Comtech: A "Power Stock"

10/21/2005 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Power Stocks is an exciting recently launched service from Bernie Schaeffer, providing in-depth profiles of a few selected stocks, offering an analysis from three dfferent perspectives-fundamental, technical, and sentiment. Here's a sample of the last "power" position.

"Comtech Telecommunications (CMTL NASDAQ) is our latest featured power stock. We recommend buying at a maximum entry price of $42 or less. Our target price for the recommendation is $55. We would set a stop loss price for this position at $35.49. Here is the rationale behind this idea.

Fundamental

"Comtech makes equipment used by satellite systems integrators, communications service providers, defense contractors, and oil companies. It makes radio-frequency signal amplifiers that are used for wireless instrumentation and medical and defense systems. It also provides two-way satellite messaging services. Customers include DIRECTV, Motorola, Northrop Grumman, Raytheon, and the US Army.

"The company has also produced stellar earnings results, beating the consensus analyst estimate in each of the past four quarters by an average of 34%. On September 22, Comtech reported fourth-quarter earnings that rose 80% over last year's fourth quarter and beat the consensus estimate by eight cents. The stock rose 9% that day in response to the news.

Technical

"Comtech has outperformed the broad market. It has gained 62% in 2005 versus a gain of just 1.3% for the S&P 500. After a brief pullback and following its earnings announcement, the stock broke out to an all-time high last week above former staunch resistance in the 38-39 region. We would now expect that area to act as support for a continuation of the uptrend. Secondary chart support also resides at 36. A major investment daily newspaper has Comtech ranked as its number-one stock in the telecom-wireless equipment group.

Sentiment

"Following last week's earnings report, Comtech's put/call open interest ratio rose sharply to its highest level in more than two months. This increase in pessimism on a fundamentally and technically strong stock suggests that there may be sideline money that could push the shares higher on more good news. Short interest rose sharply last month. Short interest jumped 22% to more than 2.7 million shares, an all-time high for the stock.

"The short-interest ratio is a significant 6.1 days to cover. Short interest also amounts to a hefty 13% of the stock's float, making it more likely that the rally will be unrelenting. From our contrarian perspective, such huge bets against a security amid a strong technical and fundamental backdrop can have bullish implications. If the stock continues to increase, those who short the stock could be forced to cover their bets by buying back those positions, resulting in more buying pressure that could push the stock even higher."

Related Articles on

Keyword Image
Seasonal Trading in Oil
3 hours ago

Oil companies typically come into favor in mid-December and remain so until late April or early May ...