Not So Direct a Ticket to Wealth

03/18/2009 10:52 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says the satellite TV provider is vulnerable to a correction, despite favorable media and analyst coverage.

According to a March 16th Barron's article (“DirectTV's Pretty Picture”), DIRECTV Group's (Nasdaq: DTV)) solid subscriber growth "is flashing a buy signal." The author states that while other satellite offerings from Sirius XM Radio (Nasdaq: SIRI) and Dish Network (Nasdaq: DISH) are struggling with bankruptcy or a shrinking subscriber base, DTV is adding subscribers and is on pace to post "solid profit gains" this year.

Part of the reason that DTV has been successful, the article notes, is the company's NFL Sunday Ticket, a subscription service that costs close to $300 per season "ticket." Meanwhile, Barron's notes, "DirecTV leads the pay-TV industry with more than 130 high-definition channels, and it aims to provide high-tech features such as video-on-demand to more than 100 million homes."

Analysts are equally enthusiastic toward DTV. Paul Wright, an analyst with Loomis Sayles, believes that the company is "executing tremendously." Meanwhile, Goldman Sachs applauded the company for "defying gravity" in the fourth quarter, but maintained a "neutral" rating for fear of growing churn and slower average revenue per user growth. Some critics of the company worry that the recession will force even die-hard NFL Ticket subscribers to ditch the service.

[But] nine of the 11 brokerage firms following the shares rate them a Buy or better, according to Zacks Investment Research, with no Sell ratings to be found. Furthermore, Thomson Reuters reports that the consensus 12-month price target for DTV rests at $28.97 per share, a premium of nearly 38% to the stock's [recent close above] $21 per share.

But analysts aren't the only ones guilty of being overly bullish on DTV. Options players are also betting heavily in favor of the shares, as the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.35 indicates that calls nearly triple puts among near-term options. This ratio ranks below 96% of all those taken during the past year, meaning that speculative investors have rarely been more optimistic toward the company.

Short sellers, on the other hand, are not buying the hype. Following a 7.5% increase in the number of DTV shares sold short during the most recent reporting period, nearly 5% of the stock's float is sold short. A continuation of this trend could apply additional downward pressure on DTV.

Technically speaking, the stock's long-term decline still stands as a reminder that the company is far from mastering the current economic downturn. Since peaking near $29 per share in September 2008, DTV has fallen more than 27% under resistance from its ten- and 20-week moving averages.

Currently, the shares are battling short-term resistance at the 21.50 level - an area complicated by the presence of DTV's falling ten-week trend line. (It closed slightly above that Tuesday—Editor.) A rejection here could shake loose some of the weaker bullish hands, thus sending the stock down for a retest of support near the $19 level.

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