Too Low Expectations for Continental?

02/03/2010 11:23 am EST

Focus: STOCKS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Elizabeth Harrow of Schaeffer’s Investment Research says there’s too much pessimism on the shares of the major airline, which means the stock might continue to do well.

A recent article in MarketWatch (“Going Easy on Airlines,” January 21) takes note of the cautious attitude displayed by Continental Airlines (NYSE: CAL) chief executive officer Jeff Smisek in the wake of the company's fourth-quarter report. Although the airline swung to a quarterly profit for the first time in two years, Smisek put a damper on the market's enthusiasm by warning that Continental is "a long way from being out of the woods."

As the [article] observes, Smisek's cautious tone might have frustrated investors, but the CEO was likely right on the money with his commentary. "A solid fourth quarter does not automatically mean all is right with the industry in 2010," notes this skeptical article, citing anemic margins for the airline sector. In fact, the author believes that the CEO's warning "was exactly the kind of reminder needed" to keep investors' expectations in line with reality.

Judging by sentiment data, it actually seems that there's no shortage of skepticism priced into CAL shares. On the options front, CAL [recently] boasted a ten-day International Securities Exchange (ISE) put/call volume ratio of 1.47, as traders bought to open more bearish bets than bullish during [a recent] two-week period. This ratio ranks in the 92nd annual percentile, indicating that CAL's put options have rarely been in greater demand over calls.

Likewise, the equity's Schaeffer's put/call open interest ratio (SOIR) [recently checked] in at 0.74, in the pessimistically skewed 83rd annual percentile. Plus, short interest rose by 7.6% during the most recent reporting period, and these pessimistic positions account for 13.7% of the security's float. With both stock and option players adopting a downbeat stance toward CAL in recent weeks, it hardly seems that expectations have become too frothy.

Plus, the stock's technical performance looks solid—CAL has climbed consistently higher along the support of its ten-day and 20-day moving averages since early November 2009. While there are still some lingering fundamental concerns for the sector, it seems as though the equity could actually reap the benefits of low expectations during the near term.

(The stock closed below $20 Tuesday, less than 10% off its 52-week high—Editor.)

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