Qualcomm Inc (QCOM)

[khemara_qc]

QUALCOMM Ahead of Earnings
John Stewart ([e-mail]) 7/18/2005 1:01 PM ET

http://www.schaeffersresearch.com/commentary/observations.aspx?ID=13650&c=obsfeed

Earnings season is now getting into full swing, and some of the heavy hitters are set to report this week. The communication equipment-maker QUALCOMM (QCOM: sentiment, chart, options) will announce its third-quarter fiscal 2005 earnings on Wednesday after the closing bell.

Wall Street expects QCOM to earn 25 cents per share, but investors might not be happy with that figure. The "whisper number" (courtesy of earningswhisper.com) of 26 cents per share for QCOM earnings shows investors are more optimistic than the average Wall Street analyst. Although the shares have been struggling for several months, expectations appear to be rather high. Optimistic sentiment has been built into the stock, which is a potential danger if the earnings turn out to be a disappointment.

A look at the performance of QCOM shares over the past several months illustrates a downward trend for the stock.

Options players on QCOM are currently showing a very high level of optimism. Call options outstanding on the stock in the nearest three expiration months outnumber put options by a ratio of nearly two-to-one. The Schaeffer put/call open interest ratio for the security is 0.52, lower than 99 percent of readings taken over the past year. Such a high level of optimism can raise the expectations bar ahead of something like an earnings report. The chart below shows how options players have steadily increased their call positions relative to put positions over the past year.

Short interest and analyst ratings are also showing that optimism toward QCOM is rather high. Short interest on QUALCOMM is down three percent over the past month, and the current short-interest ratio is less than two days to cover. A low level of short interest also weakens the stock's ability to benefit from short-covering rallies in which investors who are short the shares must buy them back in order to limit their losses. Wall Street analysts, while by no means over-the-top, are still quite optimistic toward this stock. Ratings on the shares include 16 "buys," 11 "holds," and one "sell." This should make the probability of analyst downgrades much more likely than upgrades.

QCOM's weak price performance amid a high level of optimism earns it a relatively low Schaeffer's Equity Scorecard rating of 3.0 out of a possible 10.0, confirming that the path of least resistance currently looks to be to the downside.

A strong earnings report could help the shares of QCOM over the short-term, but it looks as if the stock may struggle into the foreseeable future. Over-optimism and slowing growth rates should continue to put a damper on the security's performance.

John Stewart ([e-mail])