Going Way Beyond Copiers

09/20/2010 11:30 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says a recent magazine article on Xerox’s transition to a services company may have overestimated bearish sentiment on the stock.

[A recent] cover story from Barron's (“Xerox Delivers,” September 13th)

pushes the idea that Xerox (NYSE: XRX) is a stock that "investors shouldn't pass up." Under the guidance of [chief executive officer] Ursula Burns, the company has kicked its efforts to recast itself as a services firm into "high gear."

As a result, XRX now derives nearly 50% of its revenue from services, up from 23% the year prior. "In a few years, I want it to be known as the largest and the best global business-process-management and document-management company," Burns told Barron's.

One of the company's biggest advantages is that its competitors, and much of Wall Street, have been slow to recognize the shift toward services. "This is one of our hidden gems," says Sushil Wagle, vice president [of the] technology group for Seligman Investments, which recently has been adding to its position. Investors' sentiment on Xerox "is terrible," according to Wagle.

While investors are not starry-eyed bullish on XRX, I would be hard-pressed to find a "terrible" indicator in the bunch. Options traders are the most negative on the security, with the equity's Schaeffer's [recent] put/call open interest ratio (SOIR) of 0.55 ranking in the 69th percentile of its annual range. Typically, we like to see SOIRs in the 80th percentile before we start throwing around terms like "terrible."

Outside the options pits, investors are practically bullish. According to Zacks, six of the ten analysts following XRX rate the shares Buy or better, with no Sell ratings to be found. What's more, Thomson Reuters reports that the average 12-month price target rests at $12.71 per share—a 26% premium to the stock's close [just above $10] per share on Friday.

Finally, while declining short interest is not necessarily an indication of rising optimism, it does hint at falling pessimism. During the past month, the number of XRX shares sold short dropped by more than 14%, resulting in a paltry short-to-float ratio of 1.12%.

The stock's price action has been on par with this sentiment backdrop: not exceedingly impressive, but not too shabby, either. Since the beginning of the year, XRX has rallied more than 20%. The equity also maintains the support of its ten- and 20-month moving averages, which have provided a floor for the shares since June 2009. However, XRX has been trapped between support near $8 per share and resistance in the $10 region for the past four months.

This mediocre sentiment backdrop and overall range-bound price action doesn't diminish the possibility that XRX will have a bright future from a long-term investor's perspective. However, this relative complacency with overhead technical resistance does mean that buy-and-hold [investors] may want to wait for a better entry price.

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