Does AOL Support These Prices?

With shares of AOL (NYSE:AOL) trading around $44, is AOL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

AOL is a global Web services company with a range of brands and offerings that intrigue a global audience. The company’s business spans online content, products, and services, which it offers to consumers, publishers and advertisers. Its business operations are focused on AOL Properties and Third Party Network. It offers a range of display advertising, including text and banner advertising, mobile, video, and rich media advertising, sponsorship of content offerings, and local and classified advertising. Through its broad network, AOL is able to offer content to a large user base.

Despite a scare that AOL gave its employees recently, corporate America isn’t scaling back 401(k) programs, surveys, and employee benefits, experts say. AOL Chief Executive Tim Armstrong announced last week that instead of contributing to an employee’s retirement each paycheck, the company would give a lump sum payment at the end of the year, a move that could lower costs but potentially hurt employees’ savings. The backlash was immediate, forcing Armstrong to backtrack within days. While AOL’s announcement made headlines, employees who have a 401(k) shouldn’t worry. AOL’s announcement doesn’t reflect a growing trend, employee benefit experts say. Only eight out of 100 large U.S. companies wait until the end of the year to make contributions, according to a 2013 survey by AON-Hewitt, a large global human resources consulting firm. That level hasn’t changed in two years.

T = Technicals on the Stock Chart Are Weak

AOL stock has been trading sideways over the last couple of months. The stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, AOL is trading between its rising key averages, which signals neutral price action in the near-term.

AOL

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of AOL options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

AOL options

40.69%

3%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

March Options

Average

Average

April Options

Average

Average

As of Friday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on AOL’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for AOL look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

4.88%

-90.91%

96.56%

45.45%

Revenue Growth (Y-O-Y)

13.26%

5.57%

1.92%

1.68%

Earnings Reaction

-0.88%

8.52%

1.4%

-8.88%

AOL has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about AOL’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has AOL stock done relative to its peers – Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO), and Microsoft (NASDAQ:MSFT) — and sector?

AOL

Google

Yahoo

Microsoft

Sector

Year-to-Date Return

-4.53%

6.97%

-5.54%

0.64%

-1.61%

AOL has been an average performer, year-to-date.

Conclusion

AOL provides informational content and entertainment to a growing user base around the world. The company’s CEO, Tim Armstrong, announced last week that instead of contributing to an employee’s retirement each paycheck, the company would give a lump sum payment at the end of the year, a move that could lower costs but potentially hurt employees’ savings. The stock has been trading sideways over the last couple of months and is currently pulling back. Over the last four quarters, earnings and revenue figures have been rising. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, AOL has been an average year-to-date performer. WAIT AND SEE what AOL does this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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