Independent crude oil refiner Western Refining Inc. (NYSE: WNR) is slated to step into the earnings limelight ahead of the open on Thursday, Nov. 4. Currently, Wall Street is looking for a profit of 12 cents per share from the company, a vast improvement over WNR's loss of five cents per share in the same quarter last year. Historically, however, the firm is on shaky fundamental footing, missing the consensus estimate in two of the prior four reporting periods, with an average downside surprise of 16.6%.
Fortunately, WNR's technical backdrop is considerably more impressive. The stock has gained more than 42% since the start of 2010, and has bested the S&P 500 Index (SPX) by more than 29% on a relative-strength basis during the prior 60 trading days. What's more, the stock is currently rallying along support from its 10-day and 20-day moving averages - trendlines that WNR has closed only one session below since August.
On Oct. 13, the equity spiked nearly 15% following news that half of France's refineries were shut down due to strikes and that the International Energy Agency raised its forecast for world oil demand. This spike created a "flag pole" for the shares, and WNR has since consolidated into the "flag" portion of this technical formation. In technical analysis, "flag" formations are typical of continuation patterns, meaning that WNR could be on the verge of the next upleg in its longer-term uptrend.
Despite the stock's strong technical backdrop, investors are betting heavily against WNR. For instance, the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.45 indicates that puts outnumber calls among near-term options. This ratio also ranks in the 99th percentile of its annual range. In other words, short-term options traders have been more bearishly aligned only 1% of the time in the prior 52 weeks.
Checking in with the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), we find that sentiment is growing increasingly bearish heading into the company's quarterly report. Specifically, WNR's 10-day ISE/CBOE put/call volume ratio of 0.75 ranks in the 83rd percentile of its annual range. With put buying gaining momentum, it could be a sign that investors have set their sights well below Wall Street's earnings expectations.
Outside the options pits, short sellers hold sizable positions against the shares. Despite a nearly 12% decline during the past month, a hefty 26.25% of the stock's float remains sold short. Should this short-covering trend gain momentum, it could provide additional lift for WNR. What's more, if the shares break out of their "flag" formation following a solid earnings report, it could force these bears into a short-squeeze situation.
Finally, WNR could benefit from some positive attention out of the brokerage bunch. According to Zacks, six of the eight analysts following the shares rate them a "hold" or worse. Any upgrades following the stock's recent breakout could provide an additional tailwind for the equity.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column