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 Bankrate
(Nasdaq: RATE), the Floridian provider of financial services. The company
publishes a series of print newspapers and enjoys partnerships with major
Internet companies such as America Online and Yahoo! (Nasdaq: YHOO), which drive
traffic to the company’s flagship Bankrate.com. This site offers personal
financial information on hundreds of products, ranging from mortgages to credit
cards.
Bankrate was among the top-performing Internet companies of 2005, rising 113
percent for the year. For comparison’s sake, the much-adored and highly
publicized Google (Nasdaq: GOOG) increased 115 percent. And 2006 started with a
bang – the stock soared 29 percent in January. Despite these laudable gains,
Bankrate has yet to attract the positive attention it deserves. The options
crowd has barely noticed the stock; there are fewer than 1,000 combined
contracts open in the February and March series (and the majority of those are
on the put side). This suggests that an entire contingent of the investing
public remains on the sidelines, possessing the ability to buoy the shares
higher.
Wall Street is also reluctant to show support for Bankrate. According to Zacks,
the stock is followed by only four analysts. Of this quarter, just one has named
Bankrate a “buy,” leaving two “hold” ratings and a rare “strong sell”
designation. Compare this snubbing to the outpouring of love for Google, which
barely outperformed Bankrate shares last year (and is getting creamed so far
this year). Clearly, there is more than ample room on the Bankrate bandwagon,
which should help the shares in 2006.
On the other hand, the short-selling crowd has taken an interest in the stock.
In fact, more than one-quarter of the security’s available float is dedicated to
the short side, resulting in a meaty short-interest ratio of more than 13 days
to cover. If the stock continues to supplement its gains, some of these bears
could bail out of their positions by buying back the stock. This action would
clearly provide additional fuel for the equity’s rally.
Technically speaking, Bankrate successfully tested support from its 20-week
moving average in October and early January, rebounding from this trendline to
nab a new all-time high on January 27. The shares are currently in the process
of digesting January’s gains and appear poised to resume their assault on
record-high territory with the help of their supportive 10-week and 20-week
moving averages.
Bankrate could garner some attention on February 14, when it spends part of
Valentine’s Day in the earnings spotlight. Consensus analysts’ expectations, as
reported by Reuters, stand at 16 cents per share, a 33-percent improvement over
year-ago earnings. RATE has managed to top analysts’ expectations in four of the
past five reporting periods by an average of 19 percent. A positive report,
propped against the backdrop of skepticism and technical strength, should keep
the equity’s solid uptrend on track.
