Hot Retailer Defies the Skeptics

02/15/2010 11:21 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says Urban Outfitters has attracted some doubters in the media and on Wall Street, but it’s still in good shape

Standard & Poor's announced [recently] that trendy clothier Urban Outfitters (Nasdaq: URBN) would replace Affiliated Computer Services (NYSE: ACS) on the S&P 500 index, [a recent article in Barrons.com reports—“Skeptical of Urban Outfitters’ Renewal,” February 1st].  What's more, URBN was upgraded by FBR Capital Markets. [The shares have more than doubled] during the prior 12 months.

That said, the author downplays these gains, saying that much of URBN's rally took place last spring and summer, and that most of the stock's gains since then have been muted.

"Our belief based upon some of the traffic trends we saw in January is that we're going to be very choppy in the first three to six months of the year," says Betty Chen, an analyst for Wedbush Securities. "Partially because if you look at unemployment and housing, it's still very volatile. And when we speak to consumers, they also remain very cautious on spending."

Finally, the author takes aim at URBN's valuation. "We envision greater downside risk. If the company's core numbers remain weak, URBN could have a hard time remaining at current levels,” the [report] says.

Technically speaking, URBN has been a laggard recently, with the shares underperforming the S&P 500 on a relative-strength basis. What's more, the equity's bout of poor price action has it trading below former support at its ten- and 20-week moving averages.

That said, URBN has rebounded from round-number support in the $30 region to reclaim its 20-week trend line. (It closed below $31 Friday—Editor.) This could be a bullish sign for the security.

What's more, investor expectations are pretty low. URBN's 10-day International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) put/call volume ratio of 3.04 indicates that puts bought to open have more than tripled calls purchased during the prior two weeks. This ratio also ranks above 86% of those taken in the past year, meaning that options traders have rarely snatched up puts at a faster rate.

Meanwhile, nearly 8% of URBN's float remains sold short, despite the number of shorted shares plunging by 9.5% during the most recent reporting period. This leaves a substantial number of bears vulnerable to a potential short-squeeze situation.

The stock's sentiment outlook is not without its pitfalls, however. Currently, 19 of the 28 brokerage firms following the shares rate them a Buy or better. While some of this optimism is warranted, given the stock's [big gains,] a poor showing in the earnings confessional could prompt some of these bulls to cut their ratings.

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