TiVo Time for Call Buyers

by Joseph Hargett | May 30, 2012 8:34 am

After the close of trading this afternoon, digital-video recorder specialist TiVo (NASDAQ:TIVO[1]) will step into the earnings limelight. Currently, Wall Street is projecting a first-quarter loss of 15 cents per share, a figure that’s a significant improvement over the company’s loss of 29 cents per share in the same quarter last year. Revenue is expected to rise 20% to $54.9 million from $45.8 million a year ago.

TiVo has matched or bested the consensus estimate in each of the prior four reporting periods, with an average upside surprise of roughly 10%.

Expectations among Wall Street analysts are considerably high ahead of today’s report. According to data from Thomson/Reuters, 12 of the 14 analysts following TIVO rate the shares a buy or better, with no sell ratings to be found. What’s more, the consensus 12-month price target rests at $14, a whopping premium of about 51% to Tuesday’s close at $9.24. Downgrades and/or price-target cuts could be a possibility if TiVo fails to live up to the hype.

Options traders are also heavily bullish toward TIVO. Specifically, the stock’s put/call open interest ratio for the front three months of options arrives at 0.28, revealing that calls more than triple puts in the June, July and August series. Furthermore, this ratio arrives below 92% of all those taken during the past year, according to data from Schaeffer’s Investment Research.

Not everyone is high on TIVO, however. Despite a 3.6% decline during the most recent reporting period, some 11.5 million shares, or 9.6% of the stock’s float, remain sold short. In fact, this sizable accumulation of short positions may help explain the preference for calls among options traders. That’s because short sellers often purchase calls as a hedge against their positions.

Technically speaking, while TIVO has suffered heavy losses since setting a double-top near $12.30 in March, the stock is still sitting on a 3% gain for the year — modestly below the S&P 500 Index’s year-to-date advance of about 5.5%. Plus, the stock’s sharp decline during the past several weeks has pushed its 14-day RSI into oversold territory, hinting that bargain hunters may be more likely to step in at this point — especially if the quarterly report surpasses expectations once again.

Given the potential for a short-covering rally, the stock’s oversold status and TiVo’s propensity to top earnings expectations, options traders may want to consider a July 9/10 bull call spread. This spread was offered at 45 cents, or $45 per pair of contracts. Breakeven lies at $9.45, a 2.6% gain from Tuesday’s close, while a maximum profit of 55 cents, or $55 per pair of contracts, is attainable if TIVO closes at or above $10 when July options expire.

  1. TIVO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TIVO

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