SkillSoft (SKIL)

Source: http://www.zacks.com/commentary/8406/SkillSoft+%28SKIL%29
Posted on Monday, August 25th, 2008 | In Stocks to Watch

Contributed by: Zacks Market Commentaries (http://www.zacks.com/) -

In last week’s edition of Trading Tools, Cincinnati-based grocery guru Kroger (KR) was examined, as it showed up on the Zacks Unusually High Options Volume screener. This week, I’m utilizing the Zacks Put/Call Ratio Greater than 1.0 filter in an effort to find stocks surrounded by heavy pessimism in the options arena. Digging through the results, one equity caught my attention: New Hampshire-based e-learning company SkillSoft (SKIL).

Before we begin, let’s explain the contrarian stance that makes Schaeffer’s so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.

However, keep in mind that some optimism and pessimism is genuinely warranted and isn’t always a contrarian indicator Â– like an outperforming stock with many “buy” ratings or an underperforming stock with a plethora of “sell” ratings.

The Put/Call Ratio Greater than 1.0 Screener

First, an explanation on our stock screener. The filter looks for stocks with a high put/call open interest ratio, indicating puts outnumber their call counterparts amongst near-term options. Why is this important? Simply stated, a high Schaeffer’s put/call open interest ratio (SOIR) Â– measuring options slated to expire within 3 months Â– suggests that expectations for the security to rally are extremely low. In other words, a high ratio often indicates pessimism amongst short-term options speculators.

From a contrarian perspective, we are looking for a stock that has low investor expectations (such as heavy put trading) and a strong technical performance. This combination of strength on the charts and skepticism among option traders leaves substantial room for continued upward momentum should these bearish bets unwind.

Option Players Approach an Annual Bearish Peak

As mentioned above, SKIL was brought to my attention due to its unusually high SOIR. More specifically, the stock’s SOIR currently rests at 6.74, indicating that there are nearly 7 times as many calls than puts in the front-three month series of options. This configuration ranks in the 98th annual percentile, meaning short-term option speculators are only 2 percentage points away from an annual bearish peak.

Delving further into the options data, we find that most of these bearish bets can be found at the September 12.50 strike, home to approximately 4,000 put contracts. This strike is also popular in the November series of options, with about 4,600 put contracts in residence.

So, is the pessimism warranted?

Technical and Fundamental Skills…

From a technical perspective, the shares of SKIL have rallied atop double-barreled support from their 50- and 80-week moving averages since mid-2006. The stock is now hovering near the 10.75 level, less than a point away from a new annual high. Compared to the broad market, SKIL is in the elite, outdistancing the S&P 500 Index (SPX) by 11% during the past 60 trading sessions.

What’s more, the company looks good from a fundamental aspect, too. SKIL reported stronger-than-expected quarterly earnings, and raised its full-year outlook. The firm attributed the increased guidance to a strong level of contracts and renewals, as well as a strong performance in its core business. Furthermore, somewhat soothing to investors were comments from the company’s overachieving chief executive, Chuck Moran, who opined that he felt the company could do even better in the future.

The Bottom Line

SKIL followers should keep an eye on the stock’s 50- and 80-week moving averages, as this duo has played the part of support for more than 2 years. As potential resistance, however, investors should watch the 11.50 neighborhood, as this area capped the security’s rally attempts in mid-April.

On the sentiment side of things, SkillSoft fans should pay attention to the skepticism surrounding the equity. A continuation of SKIL’s long-term journey into the black Â– as well as the company’s encouraging outlook Â– could spook the bears. An unwinding of skepticism in the options arena could act as a potential catalyst even higher.

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