Is AOL A Buy?

With shares of AOL (NYSE:AOL) trading around $39, 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. The AOL brand lost its spark several years ago but with recent restructuring, is picking up steam once again. As an increasing number of consumers look for entertainment and information online, companies like AOL stand to see rising profits.

T = Technicals on the Stock Chart are Strong

AOL stock has seen a powerful uptrend since selling off a bit in 2011. The stock is now trading near all-time high prices and shows no imminent signs of slowing. 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 slightly above its rising key averages which signal neutral to bullish 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.

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Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

AOL Options

48.6%

53%

50%

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

Put IV Skew

Call IV Skew

May Options

Flat

Average

June Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

84.05%

1200%

254.55%

450%

Revenue Growth (Y-O-Y)

3.94%

0%

-2.05%

-3.99%

Earnings Reaction

7.35%

22.03%

7.23%

3.47%

AOL has seen increasing earnings and revenue figures over most of the last four quarters. From these figures, the markets have been very excited about AOL’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

AOL

Google

Yahoo!

Microsoft

Sector

Year-to-Date Return

30.36%

16.25%

22.66%

22.63%

14.23%

AOL has been a relative performance leader, year-to-date.

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Conclusion

AOL provides informational content and entertainment to a growing user base around the world. The stock has been in a strong uptrend since establishing lows in 2011. In fact, AOL stock is currently trading near all-time high prices. Earnings and revenue figures have been growing over the last four quarters which has made investors very excited. Relative to its peers and sector, AOL has led in year-to-date performance by a wide margin. Look for AOL to OUTPERFORM.

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