At Schaeffer’s Investment Research, we employ a three-tiered analysis approach
known as Expectational Analysis® (EA) that was created more than two decades
ago. EA utilizes traditional methods of fundamental and technical analysis and
combines these with a third, crucial look at investor sentiment. It is this
third layer of analysis that provides a critical edge in selecting stock and
option plays. Both anecdotal and quantifiable measures of investor sentiment
provide a window into how the investing crowd perceives reality. These
perceptions serve as powerful contrarian indicators, as the crowd tends to move
as a herd and is, to paraphrase the venerable contrarian Humphrey Neill, “right
during the trend but wrong at both ends.” A look into the psyche of the
collective investing masses, while also taking into account important technical
and fundamental variables, can offer a reliable recipe for trading success.
The EA methodology has turned up a profitable trading opportunity in
Priceline.com (Nasdaq: PCLN), the self proclaimed “name your own price”
company. The firm has pioneered a unique e-commerce pricing system that enables
consumers to use the Internet to save money on a wide range of products and
services while enabling sellers to generate incremental revenue. Using a simple
and compelling consumer proposition, PCLN offers deals on airline tickets, home
financing, hotel rooms, rental cars, cruises, and vacation packages.
Travel-related services account for nearly all of the firm’s sales.
On May 3, PCLN reported pro-forma first-quarter earnings of 19 cents per share
on revenue of $241.9 million, falling in line with Wall Street expectations.
However, the company also guided higher for the second quarter, with revenue
growth expected to advance by eight to 12 percent. What’s more, PCLN lifted its
fiscal 2006 earnings expectation, placing it above analysts’ expectations.
Despite the recent volatility in the market and the downturn in the major market
indices, PCLN has managed to weather the storm rather well. While major indices
have blow through short-term and intermediate-term moving averages, PCLN
continues to maintain the support of its 10-week and 20-week moving averages.
Currently, the shares are in the process of rebounding off support in the 29
area. This area served as resistance in June 2004 and May 2006, and should now
act as support. Furthermore, the equity is a relative-strength leader versus the
S&P 500 Index, outpacing the broad-market indicator on a daily basis since
February 2006.
Turning to PCLN’s sentiment picture, there is ample pessimism in the stock’s
backdrop to help perpetuate a continued run higher. While options players are
not heavily pessimistic on the equity, PCLN’s Schaeffer’s put/call open interest
ratio (SOIR) has been on the rise for the past several weeks. A rising SOIR
indicates that puts are being added at a faster rate than calls among the front
three months of options, and it’s an excellent indicator that bearish sentiment
is on the rise among these short-term speculators.
Elsewhere, short selling has become quite a popular stock-trading strategy when
it comes to PCLN. Currently, more than 35 percent of the security’s total float
is sold short, and it would take roughly nine days for these bearish investors
to buy back their bets. Additionally, the number of PCLN shares sold short has
declined steadily since March 2006, dropping by approximately 11 percent during
this time frame. Should this short-covering trend continue, the influx of
sideline money could help extend PCLN’s run higher.
Finally, PCLN’s combination of tenacious technical performance amid a
broad-market downturn and lingering pessimistic sentiment has earned the stock a
Schaeffer’s Equity Scorecard rating of 7.0 out of 10. This elevated
rating indicates that the security could continue to outperform the broad market
during the intermediate term.
