Frontline Ltd. Shares Soar Despite Bearish Sentiment

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Jul 2008

Frontline Ltd. is the world's leading international oil tanker shipping company; FRO ships crude oil. Based in Hamilton, Bermuda, the company's fleet consists of 35 Suesmax tankers (of which 8 are combination carriers and 8 are newbuildings) and 54 VLCC tankers (including 8 newbuildings). The company transports oil from the Middle East to the Far East, Northern Europe, the Caribbean, and the U.S. In late May, the tanker operator announced that its first-quarter net income rose 40% to $221 million or $2.95 per share. Last year the company reported $158.8 million, or $2.12 per share. Analysts were looking for earnings of $2.38 per share. The company said, "Although the U.S. economy is showing signs of weakness, the world economy is still strong...Based on the regular trading results so far in the second quarter of 2008, the board expects a strong result including continued high dividend payment for the second quarter of 2008." The company is expected to report earnings of $2.36 per share for its second quarter slated for release on August 29.
While oil sales have hit record levels this year, it is hardly surprising that Frontline's shares are also soaring. Sine the end of January, the stock has added 83%. Currently the shares are seeing support from their 10-day trendline, but their 30-day moving average could be acting as a level of resistance.
Looking at the longer term, the security has grown 101% since March 2007. Since hitting new peaks in June of this year, the equity has consolidated along its 10-week moving average. If the stock is able to pull above this trendline it could be catapulted even higher.
To illustrate the long-term strength of this stock even more, the shares have surged 2,309% higher since October 2002.
While FRO is hitting record highs, brokerages don't seem convinced of its strength. According to Zacks, only 1 analyst rates the company at "strong buy." Three of the remaining 5 analysts are recommending "holds," while 1 bear has given the shares a "strong sell" rating. Furthermore, as reported by Thomson Financial, the company's average 12-month price target is currently $58.47. This suggests that brokerages assume the stock has hits its peak and will fall at least 12% within the next year.
However, maybe brokerages are starting to recognize the strength in the shares. As recently as July 23, analysts at J.P. Morgan Chase upgraded FRO to "overweight" from "neutral." If any additional brokerages to upgrade the security, or raise their price targets, it could kick off new buying pressure, pushing the stock higher.
Elsewhere, short-term option player sentiment is also pessimistic. The Schaeffer's put/call open interest ratio (SOIR) for FRO stands at 1.54. This number indicates that there are more puts than calls on options that expire in less than 3 months. However, it is more effective to compare this number to all of those during the past 12 months. This reading is higher than 95% of all the readings taken during the past year. In other words, option players have been more bearishly aligned only 5% of the time during the past 52 weeks.
Short-sellers are also betting the stock is going to start falling. These bears have sold short more than 4.78 million shares, accounting for almost 10% of the company's float. With the stock in an uptrend, an unwinding of these short positions could add more buying pressure to the shares.
Overall, despite the stock's continuing uptrend, investors remain unconvinced of the stock's strength. From a contrarian view, the combination of growing prices and bearish sentiment has bullish implications.

Source: Schaeffers Research