Cash Cow Heads for Greener Pastures

12/21/2010 4:21 pm EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Recent pessimism on Verizon shares augurs well for additional gains, writes Joseph Hargett of Schaeffer’s Investment Research.

Despite AT&T's (NYSE: T) supposed iPhone advantage, Verizon Communications' (NYSE: VZ) wireless division has maintained its title of industry leader. In fact, Verizon has actually extended its lead over AT&T since the iPhone's 2007 debut, adding about 14.5 million customers compared with just 12.8 million for AT&T. Unfortunately for AT&T, notes a recent Wall Street Journal article (“Investors Should Start to Hear Verizon Now,” Dec. 13.) Verizon is about to get an iPhone of its own, in addition to its so-called "4G" LTE high-speed network. [LTE is Long Term Evolution, a technical standard—Editor]

However, Verizon lags AT&T on market penetration in high-end phones. According to estimates from UBS Securities, as of Sept. 30, about 57% of AT&T's customers had "integrated devices," smartphones or phones requiring a data plan, versus about 40% for Verizon. Analysts believe that the company's entry into the iPhone market could boost Verizon into the lead on this front as well, creating the potential for the company to continue outperforming its rivals.

Contrarian Takeaway
Bullish sentiment has been hard to come by lately for Verizon Communications. Options traders are betting heavily against the shares, with the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.33 ranking in the 85th percentile of its annual range. [Suggesting options traders have only been more bearish on the stock 15% of the time over the last year—Editor.] Meanwhile, the brokerage bunch has doled out 20 "Hold" or worse ratings, compared with just 11 "Buys" or better.

Data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) point toward a rising preference for call options, with VZ's ten-day ISE/CBOE call/put volume ratio of 3.4 indicating that calls bought to open have more than tripled puts purchased in the prior two weeks. This ratio also ranks above 83% of all those taken in the past year. However, the implications of this rise in call buying are muted when taken in context with the more than 7% jump in VZ shorted shares last month, as short sellers typically buy calls to hedge their bets.

Bullish Price Signals
Given the prospects highlighted by the Journal, this negativity seems a bit extreme. What's more, these Verizon bears appear even more out of place looking at the stock's recent price action. While VZ has only eked out a year-to-date gain of roughly 10%, the stock has soared some 37% since the beginning of June. Also, the equity recently broke out of a trend channel between the $32 and $33.50 levels, tagging a fresh two-year high in the process. With VZ now trading above former long-term resistance at the $34 level, we could see the aforementioned investor pessimism unwind in the form of additional buying pressure. [Shares traded at $34.84 recently.]

[One of Verizon’s biggest charms is a 5.6% yield that’s bested only by AT&T’s 5.9% within the Dow Jones Industrial Average. The decent payouts among blue chips haven’t been lost on our market experts, with Richard Young, Josh Peters, and Taesik Yoon recently nominating their own favorites—Editor.]

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