Sallie Mae Bad News for Bears

05/23/2011 2:03 pm EST


Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Despite the student lender’s steady climb analysts and option traders remain unusually pessimistic, writes Elizabeth Harrow of Schaeffer’s Investment Research.

Bloomberg Businessweek’s recent update on SLM Corp (SLM) opens by admitting that the student lender—more informally known as Sallie Mae—"has taken a thrashing in recent years."

Thanks to the one-two punch of the Great Recession and the passage of unfavorable legislation by Congress in 2010, SLM is trading well below its mid-2007 highs near $58.

However, the author is encouraged by SLM's technical outperformance in 2011, as well as the student lender's freshly hiked earnings forecast and recently reinstated dividend.

The company has "$146 billion of federal college loans on its books… [to] keep the lights on," the author notes. This should allow SLM to focus its energy on rebuilding its private student-loan business.

Contrarian Takeaway
SLM has cruised considerably higher in 2011, with the stock capitalizing on support at its ten-week and 20-week moving averages to collect a gain of 27%.

However, there's still a healthy amount of skepticism surrounding the financial firm, suggesting that additional upside could be in store as the lingering bears are forced to admit defeat.

For starters, there are only five analysts currently following SLM, according to Zacks—and three of those maintain a lukewarm Hold rating. Plus, the equity's average 12-month price target of $17.33 stands less than one point north of SLM's May 19 close at $16.48.

Any upgrades, price-target hikes, or bullish initiations from the brokerage community could help to draw new buying interest to the shares.

Plus, options players are firmly planted on the bearish end of the sentiment spectrum. During a recent ten-session stretch, speculators have bought to open 2.79 puts for every call on SLM. This ratio ranks in the 82nd percentile of its annual range, as options traders have scooped up puts over calls at a faster pace only 18% of the time during the past year.

As SLM continues to climb the charts, a gradual capitulation among pessimistic players could propel the shares even higher.

Elizabeth Harrow is a contributor to Schaeffer’s Trading Floor Blog.

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