STEC, Inc. (STEC: sentiment, chart, options) has been attracting a lot of attention from call traders lately, thanks to speculation that IBM (IBM) might soon launch a buyout bid for the company. Not only that, the stock is also a favorite target of short sellers. With STEC suddenly stealing the spotlight on Wall Street, we decided to take a closer look at this small-cap semiconductor stock.
Sizing up the price action
Compared to the wildly volatile shares of STEC, the S&P 500 Index (SPX) looks downright comatose. Shares of the tech stock rallied sharply during the first nine months of 2009, before tumbling back down to earth. Currently, STEC sports a 52-week gain of about 327%, compared to a climb of just 32% for the SPX.
As evidence of the equity's tendency for stomach-churning price swings, consider this: STEC's 20-day relative-strength reading versus the SPX arrives at 157.3%, while its 60-day relative-strength reading stands at 76.6%. In other words, STEC's tendency has been to drastically outperform or substantially underperform the broader equities market. Never a dull moment, it seems...
In recent sessions, STEC has climbed the charts amid growing speculation that a buyout offer will materialize. However, the stock's progress has been halted at the round-number $20 level, which roughly corresponds with STEC's perch prior to its bearish gap in early November. Having filled in this gap, the shares now appear to be resuming their previous slump.
So, despite the stock's recent merger-and-acquisition related gains, it seems that there are still some serious technical obstacles blocking STEC's path higher. In fact, resistance from the security's 10-month moving average is also lingering in the low 20s, and this trendline could easily cap any potential breach of the $20 level.
Needless to say, we have some serious reservations about STEC's technical prospects. Our anxiety level is ratcheted even higher by the recent onslaught of buy-to-open call volume, since it seems to indicate that expectations are running rather high for this volatile little stock. However, with short interest representing such a substantial portion of STEC's float, we had to wonder whether the uptick in call buying was simply the result of increased hedging activity by the shorts.
Drilling down on the sentiment data
But enough with vague allusions to sentiment data; let's get down to the facts and figures. Short interest on STEC rose by 22.3% during the past month, and increased by 14.8% during the most recent reporting period. Now, these bearish bets account for a staggering 42.4% of the stock's available float.
This tells us a couple of things. First, these traders are apparently betting on STEC to fall sharply. Second, a continuation of this mad rush to sell STEC short could translate to increased selling pressure for the shares, thereby exacerbating its recent bout of weakness near the $20 area. But, on the other hand, this lofty short-to-float ratio also raises the possibility of a sharp rally, should STEC announce any good news that spooks pessimistic players.
Elsewhere, option traders are revealing a distinct preference for calls over puts, as noted earlier. Since the beginning of December, players on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have bought to open nearly 44,300 calls on STEC, compared to fewer than 17,000 puts. In other words, bullish bets have been about 2.62 times more popular than their bearish counterparts.
Without conducting an exhaustive phone survey of these call buyers, it's hard to tell whether they're (a) betting on a rich buyout bid; (b) short sellers looking to limit their risk; or (c) just plain bullish on STEC's prospects. However, the major accumulation of short interest on the stock is reason enough to take this apparently optimistic option volume with a proverbial brick of salt.
Meanwhile, we find it interesting that the most active January 2010-dated call during the past two weeks has been STEC's 20 strike, which has added roughly 6,000 contracts in open interest. Likewise, the equity's February 20 strike has gained more than 8,000 contracts during the past 10 days. Now, both strikes are home to peak call open interest for their respective series.
During the short term, we expect these heavy call accumulations to provide an additional layer of options-related resistance in the already-critical $20 region. We're going to keep a skeptical eye on STEC for now; if no buyout bid emerges, the stock could be hammered as short sellers redouble their bearish efforts. However, there is one caveat to consider -- with our hilarious luck, the company could potentially attract a takeover offer within mere minutes of you reading this article.
And, as always, please contact us with any questions, comments, or suggestions for future columns.
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