Not Exactly Ready to Sprint

05/26/2010 11:39 am EST

Focus: STOCKS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Elizabeth Harrow of Schaeffer’s Investment Research says there’s lots of skepticism among investors about the large wireless carrier, and she thinks it’s justified.

A recent article in [Barrons.com’s Weekday Trader column, “Sprint’s First-Mover Advantage,” May 19th,] kicks off with the upbeat comment, "Sprint Nextel executives sound nearly giddy these days, and it's hard to blame them." The author (Alexander Eule) explains that "subscriber losses have slowed," and many analysts are now expecting the wireless carrier to build its customer base during the near term.

Plus, Sprint Nextel (NYSE: S) is on the verge of launching its Evo 4G handset, which "will be the first ever phone to operate on a 4G network." Meanwhile, rival 4G offerings from Verizon Communications (NYSE: VZ) and AT&T (NYSE: T) won't be ready to hit the market for at least another year. According to this bullish article, "Sprint's first-mover status could therefore convince new customers to join Sprint's network and existing customers to stay."

Sprint executive Matt Carter has high hopes for the Evo 4G, describing it as "a true contender to the iPhone." However, lest investors worry that Sprint is placing all of its eggs in one 4G basket, the company is quick to point out that it's also reaping the benefits of its new prepaid wireless strategy.

Sprint has racked up an impressive year-to-date gain of 25.1%, easily besting the broader Standard & Poor’s 500 index (SPX). In fact, the stock sports a robust 60-day relative-strength reading of 138.4% versus the SPX.

However, the shares are now face to face with a familiar technical foe. The $4.50-to-$5 neighborhood has acted as a staunch technical ceiling since October 2008, and resistance in this area shows no signs of giving way just yet. (The stock closed above $5 on Tuesday—Editor.)

In fact, this looming technical barrier could explain why sentiment is so heavily bearish toward Sprint shares. The security's Schaeffer's put/call open interest ratio (SOIR) of 0.75 ranks in the 93rd annual percentile, just seven percentage points from an annual pessimistic peak. Meanwhile, short interest accounts for a healthy 4.4% of the equity's float, and Zacks Investment Research reports that 18 out of 28 analysts maintain a Hold or Sell rating on the security.

So, despite the stock's outperformance in 2010—and despite the promise of bullish fundamental news on the horizon—traders still have good reason to be skeptical of Sprint. Until the shares manage a decisive breakout above familiar resistance, the bears have little motivation to change their opinion of the wireless carrier.

Subscribe to the Option Advisor here…

Related Articles on STOCKS

Keyword Image
11 Reasons to Buy Microsoft
12/11/2017 5:00 am EST

For our latest recommendation, we revisit one of the world's most prominent technology companies, Mi...