Value investors go bottom-fishing

The stock market has been on a rampage for almost two years, and now some investors are fishing for value in names that have been left out of the rally.

optionMONSTER's Heat Seeker tracking system has recently detected fits of bullishness in companies such as RadioShack and SuperValu. The S&P 500 is up 23 percent in the last year, but those stocks have lost 20 percent and 45 percent of their value over the same periods, respectively.

RSH has struggled for relevance since the late 1990s, and was caught flat-footed as Apple's suite of hot gadgets took the consumer-electronics market by storm. For a while, investors had hoped for a buyout, but when that didn't materialize management resorted to buying its own shares back--but with little effect.

By early February, the stock had returned to levels last seen in October 2009. But it established a slightly higher low and started climbing. Investors snapped up the February 16 calls and the March 17 calls looking to ride it higher. Since then it has consolidated and is now potentially positioned to fill a bearish gap that occurred on Jan. 24 (see chart).

SVU has struggled with a heavy debt load dating back to an all-timed purchase of Albertsons stores in 2006. Margins in the grocery business were collapsing at the time because of increased competition from big-box retailers such as Wal-Mart. It gapped lower on Jan. 11 after cutting guidance and proceeded to test levels last seen during the first term of Ronald Reagan's presidency.

About three weeks later, the Heat Seeker lit up with call activity and the stock rallied more than 10 percent. It then pulled back but began pushing higher again last week.

Auto-repair chain Midas has also languished for years and failed to go anywhere since the stock market bottomed in March 2009. However, it has been making slightly higher lows, the most recent of which came last week.

Then on Thursday, stock volume was far above average, and Heat Seeker detected the purchase of more than 6,000 June 7.50 calls. The stock ground higher for the next 90 minutes, and then rallied by more than 12 percent in the final half-hour of trading. MDS has pulled back slightly this week but retained almost all those gains.

GameStop has also been hated by investors worried it will lose foot traffic to Internet-based games. It rebounded by more than 25 percent between mid-October and early 2011, but then got mauled after reporting a weak same-store sales number on Jan. 6.

GME continued to push lower until it, too, established a higher low--its fourth in the last 12 months. This time, the March 20 calls lit up and GME started to push higher. Short interest is a hefty 25 percent of the float so bears may look to cover, and the company's enterprise value is less than 4 times EBITDA, which could attract some value investors.

Pete also spotted activity in Frontline's February 27.50 calls for $0.20 to $0.30 late last month. The next day, the tanker stock ripped higher and those contracts had more than tripled to over $1.

The activity has been followed by occasional buying in the ocean-shipping sector, where companies such as DryShips, Overseas Shipping, and Diana Shipping have drifted lower for months and have fallen back to about the same levels that they saw in early 2009.

Disclosures: I am long SVU and WMT.

(A version of this article appeared in optionMONSTER's Open Order newsletter of Feb. 16.Chart courtesy of tradeMONSTER.)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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