Small Caps for Contrarians

07/10/2013 9:45 am EST


Wall Street tends to focus its attention on mid- and large-cap stocks, allowing profitable opportunities among small-cap securities to often be overlooked, says Karee Venema of Schaeffer’s Investment Research.

Two stocks that currently fall under this small-cap canopy and could create bullish contrarian plays include networking and communications equipment concern ADTRAN (ADTN) and electronics retailer RadioShack Corporation (RSH).

ADTRAN has performed well on the charts in 2013, with the stock up nearly 29% to trade at $25.17.

More recently, the equity has put in a solid performance against the S&P 500 Index, and has outperformed the broad-market barometer by roughly 21 percentage points in the past two months.

However, given the stock's dreary performance in 2012, when ADTN shed 35%, Wall Street is not yet convinced of the security's ability to sustain this upward momentum.

For starters, option traders at the International Securities Exchange, Chicago Board Options Exchange, and NASDAQ OMX PHLX have bought to open 132 puts for every 100 calls throughout the past 10 sessions.

This has resulted in a put/call volume ratio of 1.32. Additionally, this ratio ranks in the bearishly skewed 68th percentile of its annual range.

Meanwhile, 13.3% of the stock's float is sold short, resulting in more than 12 sessions' worth of pent-up buying demand.

Should ADTN continue to sing its technical redemption song, an unwinding of this bearish sentiment could create a contrarian boon down the road.

Technical troubles for RadioShack have been fodder for the Street for some time now, but the equity has managed a strong rebound in 2013.

In addition to regaining a foothold atop its 50-week moving average in mid-March, RSH has tacked on an impressive 45% year-to-date to linger near $3.08.

This impressive price action hasn't slowed skeptics from betting on more downside for RSH. At the ISE, CBOE, and PHLX, the equity's 10-day put/call volume ratio has climbed to 0.87 from its May 6 reading of 0.20.

What's more, the current ratio ranks in the 71st percentile of its annual range, meaning puts have been bought to open over calls at a faster-than-usual clip in recent weeks.

Additionally, short interest accounts for a staggering 35.9% of the stock's available float, and out of the 22 covering analysts, not a single one believes RSH to be worthy of a "buy" or better rating.

From a contrarian perspective, such low expectations surrounding a stock that's been performing well on the charts could translate into near-term tailwinds.

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