At Schaeffer’s Investment Research, we employ a 3- tiered analysis approach
known as Expectational Analysis® (EA) that was created more than 2 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 latest opportunity unearthed by the EA methodology is Fossil (FOSL).
According to Hoover’s, Fossil (FOSL) is a leading mid-priced watchmaker
in the U.S. The company’s brands include its Fossil and Relic watches, as well
as licensed names Giorgio Armani, Michael Kors, adidas, Burberry, Marc Jacobs,
and Donna Karan and private-label watches for Walt Disney. The retailer also
distributes fashion accessories, such as leather goods, sunglasses, and a line
of apparel. The firm sells through department stores and specialty shops in more
than 90 countries and some 150 company-owned U.S. stores.
On August 14, the company marched into the earnings confessional to reveal a
second-quarter profit of $14.7 million, or 21 cents per share, compared to its
year-ago profit of $11.2 million, or 16 cents. Sales during the 3-month period
climbed more than 18% to $306.5 million. Analysts had predicted earnings of 19
cents per share.
Technically speaking, the shares have enjoyed a stellar rally since September
2006, rising along their 10-week and 20-week moving averages. During this time
frame, the equity has suffered only 4 weekly closes below both of these
trendlines. What’s more, the stock has easily surpassed its peers in the Retail
HOLDRS Trust (RTH) on a weekly basis since May 2006. In fact, the equity has
tacked on an impressive 66% since the start of 2007, while the RTH has added
only 1% and the S&P 500 Index has increased less than 8%.
As followers of the EA method, we ideally like to see solid price action persist
despite a backdrop of skepticism; this implies that there could be additional
money waiting on the sidelines that hasn’t yet been committed to the bullish
cause. It seems as> though there is plenty of room on the bullish FOSL
bandwagon. Options players have leveled some heavy bearish bets against the
stock in an attempt to call a top to its uptrend. The Schaeffer’s put/call open
interest ratio for FOSL stands at 1.15, as put open interest easily outweighs
call open interest among near-term options. This reading is also higher than 84%
of those taken during the past year. In other words, short-term options
speculators have been more bearishly aligned against the shares only 16% of the
time during the prior 12 months.
Short sellers have also loaded up on the pessimistic positions when it comes to
this trendy retailer. In September, the number of FOSL shares sold short
increased by 10% to nearly 5 million shares. This hefty buildup of bearish bets
accounts for more than 11% of the company’s float and is 7 times the stock’s
average daily trading volume. As investors unwind their bearish bets and jump on
the stock’s bandwagon, they will help to push the security even higher.
