SAIC (SAI), a government contractor that operates primarily in the defense and aerospace arenas, won four major contracts this month, so future revenue is looking solid.
The company reports earnings Tuesday after the close. Since going public in late 2007, SAI has missed just one consensus earnings estimate. Analysts project a small, 2-cent increase (less than 7%) in profits for Q4, the smallest such increase in more than two years. So expectations are certainly muted.
SAIC’s sentiment backdrop is showing some doubts. (Keep in mind that pessimistic sentiment reflects lower expectations that often lead to upside earnings surprises. Conversely, optimism represents higher expectations and, thus, can create some vulnerability if those expectations aren’t met.)
Short interest has soared since September, pushing the short interest/float ratio to heights that suggest a short squeeze is possible. Analysts generally like the stock, but six of 15 “holds” tell us that there’s plenty of room for upgrades.
One big caution flag, though, is options activity, which has been heavily skewed on the call side. In fact, Wednesday’s option trading shows call volume of around 16,000 contracts in the April, May and August series compared to a mere 141 contracts on the put side. That difference is hard to ignore.
On the charts, SAI has had an unremarkable run, going nowhere in the past three months. But the 50-day moving average has provided solid support for the past month. Wednesday’s pullback to that trendline offers a solid entry point for a pre-earnings trade.
Other than the over-the-top call activity, SAIC looks like a solid play. The fundamentals are sound, with government contracts flowing in at a brisk pace. The shares are sitting just above their 50-day moving average, which hasn’t allowed a daily close below in more than a month. And sentiment, at least among analysts and the shorts, is cautious.
I’d say the odds favor a strong post-earnings move to the upside, but don’t wait. Wednesday’s pullback makes the trade more attractive.
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