Contrarian Call on United Rentals

05/12/2014 7:00 am EST

Focus: STOCKS

Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

Each week, using a combination of contrarian sentiment indicators, along with fundamental and technical analysis, Beth Gaston Moon chooses an Option Idea of the Week; here’s her latest idea from Schaeffer’s Investment Research.

Equipment rental concern United Rentals (URI) has been heading higher on the charts in impressive fashion of late. Over the last 52 weeks, the shares have appreciated nearly 84%, but that only tells part of the story, as this rally has accelerated in recent months.

Since its early October low of $55.05, URI shares are up more than 70% to their present perch at $93.76. The stock is fresh from a retest of support at its 60-day moving average, which contained previous pullbacks in the stock during its latest upleg, and looks poised to continue doing so.

Additionally this week, URI shares bounced back above their 40-day moving average. Data from Schaeffer's Senior Quantitative Analyst Rocky White reveals that previous pullbacks to this trendline have proven to be opportune entry points for URI.

Following the past nine signals, United Rentals has been trading higher 75% of the time three weeks later, with an average gain of 4.6%.

As the stock continues to move higher, we could begin to see capitulation among its skeptics. Such a sentiment shift could, in turn, contribute to URI's upward momentum.

Short sellers have already begun to move toward the exits, as short interest has dropped by almost 26% during the last two reporting periods. Still, nearly 6% of the stock's float remains sold short, offering additional fuel for a continued short-covering rally.

Meanwhile, options speculators have shown a preference for long puts over long calls. Specifically, during the last ten days, the options crowd has bought to open 1.36 puts for every call. This put/call volume ratio has increased notably from the end of March, when it resided at 0.30.

Turning to Wall Street, URI has seen three positive price-target adjustments during the last two months (from KeyBanc, Jefferies, and UBS).

The consensus 12-month target of $104.94 is just 12% north of the equity's current price, and given the stock's year-over-year return, more price-target hikes could be in the offing, which would likely power additional short-term upside in the shares.

Option traders interested in speculating on continued upside in United Rentals shares could consider buying the in-the-money September 87.50 call, which last was asked at $11.80.

It is worth noting that implied volatility readings for near-term options are below historical measures, which suggests a favorable overall pricing environment for options buyers.

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