On a day when many telecom stocks were hit with downgrades, China Mobile Limited (NYSE: CHL) distinguished itself this morning by scoring an upgrade. Goldman Sachs raised its rating on CHL from "sell" to "neutral," while simultaneously trimming the stock's price target from HK$95 to HK$90. The price-target cut echoes a similar move made by Citigroup on Sunday; the brokerage firm cut its target on CHL from HK$120 to HK$100.
In response to today's mixed analyst comment, CHL is down more than 7% at midday. The equity has shed about 42% year-to-date, and its lengthy decline could prompt additional price-target cuts during the short term. According to Thomson Financial, China Mobile shares are trading about 60% south of their average 12-month price target of USD $81.01.
Today's upgrade from Goldman comes as CHL is approaching former support at the $44 level. This region buoyed the stock in early 2007 and earlier this month, which suggests that it could once again provide a floor for the shares. Unfortunately, though, the stock is also looking up at stiff technical resistance from its 10-week moving average, which means China Mobile might find itself bouncing sideways in the weeks to come. Or -- even more troubling -- a continued drop in the share price could spark an unwinding of widespread optimistic sentiment.
For example, option traders are wildly bullish on this slipping security. Peak call open interest rests at the October 55 call, with 8,392 contracts in residence. This strike is also home to peak put open interest for the month, which amounts to just 4,017 contracts. Currently, the call is out of the money, while the put is in the money -- and CHL will have to surmout several technical obstacles before these bullish bets become profitable. If these option players grow frustrated with CHL's progress, they could back away from their optimistic stance.
Meanwhile, the International Securities Exchange (ISE) notes that option traders have bought more than 3 calls on the stock for every 1 put during the past 10 days. The equity's ISE 10-day call/put ratio of 3.45 ranks higher than 80% of other such readings taken during the past year, which indicates that CHL's option activity on the ISE has rarely been more bullishly skewed. A reversal of this favorable sentiment could be truly damaging for the beaten-down stock.
Of course, these option players could be rewarded if the 44 level again steps up to buoy the security -- so far today, this region hasn't been breached. The primary point of concern for China Mobile is that many investors have already aligned themselves optimistically toward the shares, which could indicate a relative lack of sideline cash to help fuel a rebound off of technical support.
Overall, there are currently more downside risks for CHL than upside opportunities. The stock is highly vulnerable to additional price-target cuts, and many option players are betting on a sharp rally during the short term. Barring a major breakout in the stock during the short term, it seems likely that the bullish contingent on Wall Street will soon be forced to reevaluate their stance. Any bearish commentary from brokers, or a shift of opinion among speculative investors, could smack the shares lower.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.
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