IPGP: Bull play in lasers

Update: My bull position in IPGP was closed on April 3 when the price fell below the 10-day price channel. The lower boundary level that triggered the closure was $63.42. The gain from initial entry was 3.2%. My position was in the form of long stocks, and I added to the position twice, raising the basis. The overall result was a 1.6% profit.

IPG Photonics Corp. (IPGP) broke above its 20-day price channel on Thursday and confirmed the bull signal today by trading above the breakout level, $64.50.

The breakout came as IPGP rose following a correction that resulted in a higher low, part of a zig-zag uptrend that began in mid-December 2011 from $33.33. Looking at the chart even more broadly, IPGP has been in an uptrend since early 2009, when it hit bottom at $6.79.

This is IPGP's 17th bull signal since the broad markets began to recover in early 2009 from the post-recession crash.

Nine of the 16 prior breakouts to the upside were profitable, with each trade on average returning 25.5%.

The yield, adjusted by the 56.3% success rate, gives a score of  14.4%, nearly triple the 5% minimum I prefer.

This is the fifth bullish breakout since the present uptrend began in December 2011. Three of the four prior breakouts to the upside were successful, each on average yielding 21.2%.

The eight stocks surviving my initial screens last night tended toward lower liquidity. The most liquid, ICON, has an average volume of only 1.3 million. (See last night's posting for a complete list of the survivors.)

I ended up picking IPGP for further analysis based mainly on its high score -- average yield adjusted by the success rate -- and also its good success rate in recent months.

IPG Photonics, headquartered in Oxford, Massachusetts  makes fiber lasers, fiber amplifiers and diode lasers used in communications, medicine and manufacturing. Fiber lasers use rare-earth ions to increase the quality and power of the optical output.

Analysts are generally positive about IPGP's prospects. Their collective opinion works out to a 20% enthusiasm rating.

The company reports return on equity of 21%, which is growth-stock territory by my criteria, and has a very low debt level amounting to only 2% of equity.

The company has been profitable each of the past 12 quarters, with each quarter coming higher than the year-ago quarter. Earnings have surprised to the upside 10 times, and to the downside, twice.

Institutions own 70% of shares, whose price has been bid up to a high level. It takes $5.93 in shares to control a dollar in sales.

IPGP on average trades 318,000 shares a day. Surprisingly for stock with such low liquidity, it supports a fair selection of option strike prices with open interest running to three- and four-figures near the money in the front month.

The front-month at-the-money bid/ask spread on calls is quite broad, at 19.6%.

Calls are trading at only 12.7% of their five-day average volume. Puts are running at more than double the average volume. Speculation, it would seem, is leaning toward the downside.

In the analysis that follows, in several places I use the term "68.2%". This derives from statistics and, specifically, the concept of a standard deviation. One standard deviation means that an individual item being studied, be it political opinions or stock trades or tribolite fossils, has a 68.2% chance of falling within a certain distance of a reference level, often the mean for all of the items under study.

Implied volatility for IPGP options stands at 37%, just below the mid-point of the six-month range. Volatility has been tracking sideways since early March.

Based on that volatility, options are pricing in a 68.2% chance that trades will fall between $58.02 and $71.90 over the next month, for a potential gain or loss of 10.7%, and between $61.62 and $68.30 over the next week.

The fair-price zone on today's 30-minute chart ranges from $64.40 to $65.20, encompassing 68.2% of trades surrounding the most-traded price, $64.89. IPGP opened near the top of the zone, dropped below the zone in the first half hour of trading, and in the third hour of trading is near the most-traded price.

IPGP next publishes earnings on April 29.

Decision for my account: IPGP options have sufficient liquidity to trade, but the bid/ask spread is too rich for my money. I've opened a bull position in IPGP, structuring it as long shares.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.