CPLA: Bullish on online education

Capella Education Co. (CPLA) is in the final leg of the rise from Oct. 9, 2013 that has carried the price from $52.29 to $71.22, a 36.2% gain over about three months. CPLA broke above its 20-day price channel on Thursday and confirmed the bull signal by trading still higher on Friday.

The uptrend comes within a correction to the upside that has been underway since July 31, 2013, when the price hit a low of $25.81. The correction is retracing a portion of the rise from $23.29 in December 2006 to the all-time high of $98.01 attained in April 2010.

CPLA is a small-cap stock, the sole survivor of my second round of analysis on symbols in "Friday's Prospects".

The Chart

Under the Elliott wave count, the long-term corrective movement is wave C {+3}, usually the strongest portion of a counter-trend movement.

I count the upward correction from July 2013, wave C {+3}, as being in its final stage at one lesser degree, wave 5 {+2}, but within the early portion, wave 1 {+1} of that final stage.

That's a long way of saying that there is money to be made in CPLA according to Elliott wave doctrine.

Click on chart to enlarge.

CPLA 2 years 2-day bars (left), 90 days 2-hour bars (middle), 5 days 5-minute bars (right)

If wave 1 {+1} is complete, and it is within its final upward movement, wave 5, then CPLA will correct a portion of the rise from Oct. 2013. There's no way under Elliott to estimate how far the drop will be. A 50% correction would bring CPLA down to around $62.

Whether wave 1 {+1} is complete depends entirely on the internal count of wave 5 {-1}. There's no way to place a relative degree on the labeling in relation to wave 4 {-1}. I've used a {-x} nomenclature to show that it is a lower degree without indicating how much lower.

A move by wave 5 {-x} above $71.22, the end of wave 3 {-x}, will confirm my count. If wave 5 {-x} falls below its starting point, $68.40 on Jan. 10, then my count is incorrect and wave 1 {+1} has come to an end.

The Company

Capella Education, headquartered in Minneapolis, Minnesota, runs Capaella University, a private post-secondary online education services company that offers bachelor degrees up to doctorates, with a focus on the higher degrees. Its 43 academic programs are tailored toward adults who work in specific professions.

Analysts collectively give Capella a negative 40% enthusiasm rating.

The company reports return on equity of 21% with no long-term debt.

The peak quarter in each of the last two years has come in with lower earnings than its year-ago counterpart. The company has surprised to the downside twice in the last three years, most recently in the 4th quarter of 2012. The other quarters have all surprised to the upside.

Capella's earnings yield is 3.9%, lower than 70% of schools companies. The dividend yield is 2%, producing a 48.1% dividend/earnings ratio.

Stocks are selling at 26 times earnings, and more than double sales. It takes $2.08 in shares to control a dollar in sales.

Institutions own 86% of CPLA's shares.

Capella next publishes earnings on Feb. 11.

Liquidity and Volatility

CPLA on average trades 93,000 shares a day and supports a moderate selection of option strike prices spaced $5 apart. Open interest is extremely low. Any trade I place will be as long shares.

Implied volatility stands at 45% and appears to have begun a wide-swinging downtrend after Jan. 3. Volatility is on the high side, in the 80th percentile of the three-month range.

Options are pricing in confidence that 68.2% of trades will fall between $52.15 and $67.83 over the next month, for a potential gain or loss of 13.1%, and between $56.22 and $63.76 over the next week.

Contracts were trading actively on Friday, with puts at 41% above their five-day average voloume and calls at 6% above average.

Decision for My Account

I intend to open a bull position in CPLA on Monday if upside momentum continues, structuring the postion as long shares. If momentum falters, then I'll add CPLA to my Watchlist for further consideration.

References

My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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.