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
UTStarcom (UTSI). The company designs, manufactures, and installs a suite of
Internet protocol (IP)-based wireline, wireless, optical, and switching
solutions for the transportation of voice, data, and video traffic for
telecommunications service providers.
On August 9, UTSI reported a second-quarter loss of $21.4 million, or 18 cents
per share, coming in well ahead of the consensus estimate for a loss of 47 cents
per share. Looking ahead, the firm forecast a third-quarter loss of 23 cents to
33 cents per share on revenue of $590 million to $625 million. Meanwhile, the
Street estimate currently stands at a loss of 33 cents per share on sales of
only $608.5 million.
UTSI has been a shining star as the broad market scrambles to bigger and better
new highs. In fact, the security recently tagged a fresh annual high, busting
through long-term resistance at the 10 level in the process. Furthermore, the
security has rallied more than 51 percent along the support of its 10-day and
20-day moving averages since early August. The equity has also outperformed the
S&P 500 Index (SPX) on a daily relative-strength basis during this time frame.
In addition, the equity’s recent technical strength has drawn its 10- month and
20-month moving averages to the verge of a bullish cross. This technical
formation often portends further upside for the underlying security.
Despite the stock’s display of technical strength, we continue to see signs of
pessimism from investors. Short sellers have piled on the bearish bets when it
comes to UTSI, which is a positive sign from our contrarian viewpoint.
Currently, almost 20 percent of the security’s float is sold short, and it would
take roughly eight days to buy back these bearish bets at UTSI’s average daily
trading volume. A continued run higher in the shares could squeeze these
naysayers into buying back their positions, providing additional upside pressure
for UTSI.
Meanwhile, Wall Street is firmly entrenched in the bearish camp, as the latest
Zacks information reveals that nine of the 11 analysts covering UTSI rate
the shares a “hold” or worse. This pessimistic configuration leaves ample room
for upgrades that could boost the security.
Finally, UTSI’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.
