Coming Up Lemons?

01/26/2010 11:00 am EST

Focus: STOCKS

Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Andrea Kramer, writing in Schaeffer’s Investment Research’s Daily Contrarian, thinks there may be too much optimism about a slot machine manufacturer.

An optimistic article in Barrons.com’s Weekday Trader column—“Bally Tech’s Stock Can Hit the Jackpot,” January 19 (subscription required)—predicts that, "Amid signs that the tide of losses has turned for casino operators, the companies that provide the industry with slot machines … have a shot at gaining leverage to a recovery in industry spending."

More specifically, author [Bob O’Brien] says that Bally Technologies (NYSE: BYI) could benefit the most in the coming year, citing analysts' opinion that the firm has the greatest earnings leverage among its sector peers.

Furthermore, the columnist notes that Las Vegas casino operators posted their first monthly revenue increase in nearly two years in November, snapping a streak of 22 straight monthly declines.

With that in mind, plus the company's new management team, Bally's "significant exposure to what's called the ‘systems' business," and an appealing price-to-earnings ratio, some analysts believe now is the time to jump on BYI's bullish bandwagon.

Technically speaking, it's no secret that BYI has been impressive on the charts, virtually tripling since grazing the $14 level in mid-March 2009. (It closed above $44 Monday—Editor.)

However, guided higher along its ten- and 20-week moving averages, the stock is now approaching a critical crossroads in the overhead $48-$50 neighborhood. This region acted as a technical barrier for the shares in late 2007 and early 2008, and could once again halt the security's incline.

However, the stock's sentiment backdrop indicates that most of the Street has already flocked to the bullpen. The equity's Schaeffer's put/call open interest ratio (SOIR) of 0.62 implies that calls readily outnumber their put rivals among options slated to expire within three months. What's more, this reading registers in the 40th annual percentile, indicating that near-term traders are more optimistically aligned than usual toward BYI.

On that same note, the majority of the brokerage bunch is also devoted to the bullish camp. According to Zacks Investment Research, BYI has earned a whopping seven Strong Buys and one Buy rating, compared to just four lukewarm Holds and nary a Sell in sight.

Should the overhead $48-$50 area once again halt BYI's upward trajectory, or should analysts' expected recovery of the casino industry stall, these bulls could abandon ship. A reversal in sentiment in the options arena or a wave of downgrades could spark selling pressure on the stock.

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