Is AOL a Solid Investment?

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.

Patch, the local news site spearheaded by AOL Chief Executive Tim Armstrong, may finally be either sold or closed down after Armstrong’s 4-year journey to guide the unit to profitability has failed. Armstrong spoke at a UBS investor conference last week, saying that he will look for a partner for Patch after several sites were closed and hundreds of employees were fired from Patch over the summer. “As an AOL investor, you should think about Patch 2014 and beyond as an asset with optionality for AOL. Most likely in a partnership scenario,” Armstrong said, adding that a partnership would likely be announced in the coming weeks, according to Ad Age.

T = Technicals on the Stock Chart are Strong

AOL stock has been surging higher in recent times. However, the stock is currently trading sideways as it digests gains. 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 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.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

AOL options

37.30%

90%

88%

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

Put IV Skew

Call IV Skew

January Options

Flat

Average

February 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 very 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

-90.91%

96.56%

45.45%

84.03%

Revenue Growth (Y-O-Y)

5.57%

1.92%

1.68%

3.94%

Earnings Reaction

8.52%

1.40%

-8.88%

7.35%

AOL has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic 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), Microsoft (NASDAQ:MSFT), and sector?

AOL

Google

Yahoo

Microsoft

Sector

Year-to-Date Return

44.67%

52.42%

101.10%

36.22%

45.43%

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

Conclusion

AOL provides informational content and entertainment to a growing user base around the world. Patch, the local news site spearheaded by AOL Chief Executive Tim Armstrong, may finally be either sold or closed down after Armstrong’s 4-year journey to guide the unit to profitability has failed. The stock has been surging higher in recent times and is now trading sideways as it digests gains from a recent explosive move higher. Over the last four quarters, investors in the company have been optimistic as earnings and revenue figures have been rising. Relative to its peers and sector, AOL has been an average year-to-date performer. Look for AOL to OUTPERFORM.

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.