Beating the Bears

11/02/2010 11:29 am EST

Focus: STOCKS

Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says shares of a major insurance broker are holding up well, despite an onslaught of bearish bets, suggesting they can move up some more.

[A recent article in Barrons.com’s Weekday Trader column—“Aon Shares to Benefit from Makeover," subscription required] takes a bullish look at the shares of Aon (NYSE: AON), the world's largest insurance brokerage firm.

While the company earned some infamy a few years ago over questionable accounting and commission practices, Aon has since revamped its business. With the recent acquisition of Hewitt Associates, the company has also diversified its revenue stream and become one of the world's leading human resources consulting and outsourcing firms.

At 11.6x forward earnings, the story says, the security remains relatively cheap in comparison to its peers. Furthermore, the company boasts a strong balance sheet and a 10% [annual long-term earnings] growth rate.

Adding to the positives, the firm's profit has grown consistently, and its annual earnings per share have surprised on the up side every year for the past five years.

While this article takes a bullish stance toward the shares, investors still remain skeptical. The International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have reported 1.6 puts purchased to open for every one call purchased to open during [ten recent]  trading sessions. This ratio of puts to calls is higher than 73% of all those taken during the past year.

In addition, the Schaeffer's put/call open interest ratio for AON [recently came] in at 1.09, as put open interest outnumbered call open interest among options slated to expire in less than three months. This ratio of puts to calls is higher than 76% of all those taken during the past 12 months. In other words, short-term options players have been more pessimistically aligned toward the shares only 24% of the time during the past 12 months.

Short sellers are also skeptical. During the most recent reporting period, the number of AON shares sold short increased by 7.7% to 25 million. This accumulation of bearish bets accounts for nearly 10% of the company's total float and is eight times the stock's average daily trading volume.

Technically speaking, the shares of AON are up more than 5% since the beginning of the year. The security has rallied along the support of its ten-day and 20-day moving averages since the beginning of September. A continuation of this trend could shake loose some of the bears, creating fresh buying pressure.

(The stock closed just below $40 Monday—Editor.)

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