The computer hardware sector has been an outperformer during the past year, with the NYSE Arca Computer Hardware Index (HWI) soaring more than 87% during the prior 52 weeks. Comparatively, the tech-laden, and market-leading, Nasdaq Composite (COMP) has rallied some 48% during the same time frame. From a technical perspective, HWI has recently pulled back to support at its 20-week moving average, below which the shares have not closed a week since early March 2009.
Despite its impressive performance, investors remain extremely bearish on the hardware sector. For instance, nearly half of the 988 ratings on hardware sector stocks are "holds" or worse. As HWI continues its run higher, these bears could be forced into abandoning their losing positions, thus resulting in additional fuel for the rally.
Within the sector, shares of network-attached storage (NAS) specialist NetApp Inc. (NASDAQ: NTAP, Stock Forum) have plenty of upside potential. While the company has yet to officially set the date, NTAP should release its quarterly report near the middle of February. Currently, Wall Street analysts are looking for a profit of 37 cents per share, up sharply from last year's profit of 18 cents per share in the same quarter. Historically, NTAP has bested the consensus estimate in three of the prior four reporting periods, with an average upside surprise of 10.34%.
Despite NTAP's solid fundamentals, options traders have low expectations for the firm. Specifically, the stock's 10-day International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) put/call volume ratio of 0.79 ranks above 76% of all such readings taken in the past year. With put buying nearing an annual extreme, one could argue that speculative investors have set their sights below Wall Street's consensus earnings estimate. As such, a positive reaction to the company's quarterly report could send these bears scrambling for the exits, thus applying additional upside pressure to the security.
Options traders aren't alone in their negative outlook for NTAP. For instance, 18 of the 38 analysts following the shares rate them a "hold" or worse. Furthermore, short interest jumped by about 4% during the most recent reporting period, and now accounts for more than 4.5% of NTAP's total float. Should the company beat expectations, we could see upgrades and/or short covering propel the shares sharply higher.
Technically speaking, NTAP has rallied more than 108% during the past year, with the stock's 10-week and 20-week moving averages providing support since the market bottom in March 2009. However, the security was recently rejected at overhead resistance in the 35 region. NTAP has since pulled back to support near its 20-week trendline, which currently resides just above the round-number 30 level. Additionally, the 30 area is also home to a 61.8% Fibonacci retracement of NTAP's December 2006 high and its November 2008 low.
With heavy investor pessimism, key technical support below the shares, and an earnings report just over the horizon, NTAP looks primed for a rebound from its recent spate of short-term weakness.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column.