Chris Johnson's Contrary Favorites
10/31/2003 12:00 am EST
"Our focus is on the sentiment of the market," says Chris Johnson. "For our favorite stocks, we are looking for issues that are oversold on a sentiment basis, yet are technically and fundamentally favorable." Here's his market outlook and top picks.
"What we saw going into the end of last year was the true capitulation that the market was in need of, and investors had falsely called up until that point. In other words, in order for a true market turnaround to happen, we need to see investors run from the market, and be fearful of the market. That didn’t happen until October of last year, when a number of our sentiment indicators hit a climactic level. What we’ve seen since then is the beginning of an unwinding phase of that negative sentiment.
"The negative sentiment is the result of selling. The unwinding of that results in investors returning to the market and buying. We believe we’re in the beginning phases of that right now. Traditionally, in such periods, the tech sector has shown V bottoms. Right now, my picks reflect that historic trend. When I am looking to make my market picks, I’m looking for sectors or stocks that have investors that have turned their back on them, yet fundamentally and technically, it makes sense to be buying them. This is where we see strength for the next six months but also continuing into the second half of next year.
"AdTran (ADTN NASDAQ) is a buy. Right now, our put-call ratio is 1.13, which means there are more puts out there than calls–telling us that more people are expecting this stock to go down. It’s also a very high ratio within the last year. Short interest is 3.8 million shares. Analyst expectations show that just 18% of analysts are buying this stock. That tells me that there is a lot of sideline cash that is driven by these analyst recommendations. When we begin to see these recommendations shift to the buy side, because of the strong fundamentals and technicals, it will drive the stock to the next level.
"Foundry (FDRY NASDAQ) has a put call ratio of 0.9, which may seem low but is very high relative to the stock’s former readings over the past year. There is a little over 9 million shares sold short, and we see the short interest trending higher. 38% of the analyst have it as a buy, 50% as a hold, and 12% as a sell.
"Juniper (JNPR NASDAQ) has a put-call ratio about 1, with strong technicals and fundamentals. Considering the strength of Juniper, to have individuals shorting or buying a significant amount of puts is a sign of pessimism. Short interest is 41 million. This is an extremely large amount–a multi-year high.
"Broadcom (BRCM NASDAQ() has a put-call ratio hovering right around 1, which is very strong activity for this stock. Short interest is 13.9 million, which is high on multi-year range. Broadcom was also just downgraded by a major firm.
"Lastly, we like the Semiconductor Holders (SMH ASE), with a put-call ratio of 1.5–the highest of those I’ve mentioned. So there is quite a bit of pessimism. This has been trending higher for the past six months. Short interest is 31 million."