That left me with my STWD shares down a lot but with a bunch of new shares in SWAY with a basis of zero. The results calculation that follows is based on the combined result.
The positions gained 4.8% during their 19-day lifespan, or 92.3% annualized.
I closed because the spin-off of SWAY means that I no longer have a reasonable history on either symbol. It's all new ground, which is not my preferred trading position.
I'll keep STWD and SWAY on my Watchlist to see what the rest of the story is.
Update 1/15/2014: SWTD regained its upward momentum in the 10 minutes before the closing bell and I opened a bull position, structuring it as long shares.
Starwood Property Trust Inc. (STWD) is in the latter phase of its uptrend from $27.01 on Dec. 27, 2013, and in turn of larger uptrends beginning from $23.75 on Oct. 3, 2013, from $22.75 on June 24, 2013, and from $15.89 on Oct. 4, 2011.
It is not a chart that promises to reach for the stars but holds potential for a profit over the shorter term. At the least, STWD must exceed $28.94 by my analysis. However, it is more likely to exceed $29.68, with no rule that requires that it stop there.
In other words, STWD's upside potential from today's opening price ranges from 1% to 4.2%, and perhaps more.
On the downside, STWD must stay above $28.36 for my analysis to be accurate. That puts the maximum downside potential at negative 1% from today's opener.
The Chart
My Elliott wave frame for the chart places STWD in four uptrending waves of varying magnitude, ranging from wave 3 on the smaller size up to waves 5 {+1}, 3 {+2}, 3 {+3} and 5 {+4}
The most recent corrective wave, wave 4 {+1}, took the form of an expanding triangle. Tuesday's break above the 20-day price channel signaled the conclusion of the triangle as the middle uptrend.
Click on chart to enlarge.
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| STWD 3 years 2-day bars (left), 90 days 1-hour bars (right) |
The completion of the present wave in that degree, wave 3 {+3}, would begin a downtrend of uncertain distance that would likely stop above $22.75, although the Elliott rules are silent on how far above that level the correction might end.
Odds and Yields
This present bull signal is the seventh since wave 3 {+4} began in January 2012.
The signals split evenly between successes and failures, with the profitable trades earning 12.7% over 60 days on average and the others losing an average of 3.7% over 24 days.
The result 9% win/lose yield spread is adequate under my preferences to overcome the lack of an edge in the odds, which are indicator of how reliable bull signals are for STWD.
The odds show whipsaws happen as often as not, but the yield spread shows that the magnitude of of the successful trades is enough to overcome whipsaw losses.
At a lower degree, there has been but one completed bull signal since wave 3 {+3} began in June 2013. That play earned 9.9% over 48 days.
The Company
Starwood Property Trust, headquartered in Greenwich, Connecticut, makes its money through mortgage loans and other commercial real-estate debt. Its activities encompass not only loans it writes itself but also mortgage-backed securities based on loans issued by others.
The handful of analysts following Starwood are in the main optimistic about its future, collectively coming down with a 60% enthusiasm rating.
The return on equity is 8% with debt running at 58% of equity.
Earnings have generally been on a slight rise. Each peak quarter of the last two years has come in higher than its year-ago counterpart, but the differences are too slight and the other quarters are too variable to call it an earnings trend.
Starwood has earned a profit in each of the last 12 quarters. Six of them have produced downside earnings surprises, most recently in the quarter before the most recent. The remaining six were all upside surprises.
The earnings yield is 6.23%, higher than 71% of other real-estate operations companies. The dividend yield is 6.42%.
Starwood goes ex-dividend in March for an anticipated quarterly payout of 46 cents per share.
The stock is selling for 16 times earnings and also at a very high premium to sales. It takes $11.94 in shares to control a dollar in sales.
Institutions own 79% of shares.
Starwood next publishes earnings on Feb. 24.
Liquidity and Volatility
STWD on average trades 1.3 million shares per day and supports a relatively sparse selection of option strike prices spaced $2.50 and $5 apart, with open interest main at zero. Any trade I place in STWD will be as shares. The options are far too illiquid for my taste.
Implied volatility stands at 27% and has risen sharply from 18% over the past week. Volatility has been -- well, volatile, with wide swings and missing data. I'll do the calculations but will view the results with a great deal of skepticism.
Volatility stands at the 86th percentile of the three month range. If I constructing a bullish options spread position, I would structure it as a bull put spread, sold for a net credit and expiring in February.
Options are pricing in confidence that 68.2% of trades will fall between $26.39 and $30.91 over the next month, for a potential gain or loss of 7.9%, and between $27.56 and $29.74 over the next week.
Calls are trading quite actively today6, at 2-1/2 times their five-day average volume. Puts are crawling along at half their five-day average.
Decision for My Account
Good chart, adequate financials, and the chance of a large dividend gain if I hold it long enough. I like this stock.
I intend to open a bull position in STWD today, if it maintains upward momentum in the half hour before the closing bell. If momentum falters, I'll add STWD to my Watchlist as a potential future trade.
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.
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