It was an extremely interesting close of the trading week for Palm (NASDAQ:PALM) stock this week. Palm saw a downgrade from Ilya Grozovsky, an analyst at Morgan Joseph, on Thursday to “sell” from “hold,” citing the fact that in his view sales of the Palm Pre have slowed. He lowered his estimates of Pre sales by an eighth to 350,000 units, and does not see the buzz surrounding the Pre having the staying power of rival devices like Apple’s (NASDAQ:AAPL) iPhone.
Shares of Palm slipped just 1% on the news of the analyst’s downgrade, but the Palm bulls rode to the rescue in the face of the downgrade. Options traders were exceedingly bullish on Palm in Thursday trading action, as 38,000 calls were sold compared to just 17,000 puts. According to the Wall Street Journal, most of the action was centered around September calls with a execution price of $17.00. These options contracts sold for $.25 a piece, which means that these traders believe that Palm will appreciate to $17.25 or higher before September 18th. This is an overwhelmingly bullish statement about a stock that has already had quite a run, because the stock would need to appreciate nearly 30% in order for these contracts to have any value.
Even though the market indexes headed south today, the bullish options activity helped send the stock higher by about 4%. The lopsided action on Palm is an impressive show of support from the bulls. Recently, it has been the traders who have had the upper hand on analysts as the last three analysts calls on Palm have been downgrades (two by Morgan Joseph) dating back to mid-April. The stock has been unfazed by the downgrades and has continued its advance of more than 50% in the past 4 months. It seems almost as if the traders are playing the opposite of the analysts in this case, and it is working.
At Ockham, we don’t pay too much attention to the options activity or analyst downgrades, but this story seems to be an interesting juxtaposition of Palm bulls and bears. At least according to our methodology, Palm is Fairly Valued at present levels. Although, we are never ecstatic about a company that has not make a profit recently, we do appreciate the fact that Palm was very oversold at the end of 2008. They seem to have a product that consumers enjoy using, and Sprint (NYSE:S) customers are eager to get their hands on it. At the current price level, we are closer to a downgrade to Overvalued than we are to an upgrade to Undervalued, but that is not surprising given Palm’s meteoric rise.