Fastening Tight to a High Flyer

07/20/2010 12:00 pm EST

Focus: STOCKS

Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says Fastenal, a top-performing industrial distributor, has shown technical weakness even as traders love the stock.

Fastenal (Nasdaq: FAST) reported strong earnings [last week]. The industrial and construction supplies distributor saw its second-quarter revenue grow 20% to $571.2 million, with earnings totaling 47 cents per share. Both figures surprised Wall Street, which expected revenue of $568.7 million and earnings of 44 cents per share.

Furthermore, this quarter showed signs of stabilization in the nonresidential construction arena, which offers new optimism for the future. That segment was up 0.5% in the second quarter, the first such growth in over a year.

Wall Street remains optimistic as well. "They're a conservative company," says Michael Jaffe, an analyst at Standard & Poor's Equity Research. "When they take a step in a more assertive manner, it typically means they feel good about their sales and their business prospects."

Jaffe expects the company to grow earnings at an annual rate of 28% over the next three years. He has a price target of $69 on Fastenal shares, representing [more than 40%] up side from current levels [near $48].

Meanwhile, Fastenal’s chief executive officer Willard Oberton said, "We're very optimistic that no one will ever rebuild their inventory, and they'll depend on Fastenal to be their supply store for their factory."

Traders are extremely optimistic when it comes to FAST. The International Securities Exchange (ISE) has reported 1.2 calls purchased to open for every one put purchased to open during [recent] trading sessions. This ratio of calls to puts is higher than 66% of all those taken during the past year.

In addition, the Schaeffer's put/call open interest ratio for FAST comes in at 0.73, marking an annual low. In other words, short-term options speculators have not been more optimistically aligned toward the shares at any other time during the past 12 months.

Technically speaking, the shares of FAST have put in a solid performance, as the stock is up more than 21% since the beginning of the year. However, there are signs the shares may be starting to break down. The equity has fallen below key support at its ten- and 20-week moving averages; FAST has finished only two weeks below both of these trend lines since mid-July 2009. A breach of this support could shake loose some of the bulls, resulting in a fresh wave of selling pressure. (The stock has broken below its 50- and 100-day moving averages, but remains above support at its 200-day moving average, near $45—Editor.)

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