Tim Bovee, Private Trader: HA: Island hopper or long haul?

Update 5/30/2014: HA lost momentum, declining from the opening bell, although it did stage an afternoon recovery of sorts that at least brought the price back above the 20-day price channel, preserving the bull signal.

I've movfed HA to the Watchlist and shall consider it for later entry if it moves above today's high, $15.87.

Hawaiian Holdings Inc. (HA), a small-cap company that is sole owner of Hawaiian Airlines, has a dual nature.

It is an island hopper in the middle of the Pacific, ensuring that locals from the Big Island or Kaua'i can easily pop over to O'ahu for a glorious day of shopping.

It is also a long-haul airline carrying tourists and business people between the islands and the U.S. mainland and Asia.

HA as a potential trade shows the same duality:

It has so far escaped the downward hook that many uptrending shares have suffered and so is still in an indisputable uptrend.

That makes it an excellent trade under my shorter-term rules. But the chart and the financials also promise more growth ahead, making it a fine trade under my longer-term rules.

Do I play HA as an island hopper or as a long haul? I'll begin, as always, with ...

The Chart

Elliott wave analysis shows HA in the final wave, 5 {+1}, of an uptrend, wave 3 {+2} that began April 24, 2013 from $5.18. The rise has more than tripled the price.

That rate of rise alone ought to give any trader pause. How much more money can there be out there waiting to pile in?

Yet the wave count clearly places HA in a series of middle waves going up three degrees from the ending wave, which began April 15 from $12.35.

Even with a correction, HA has room to run.

Click on chart to enlarge.

HA 12 years weekly bars (left), 1 year 5 months daily bars (right)

The 2nd wave in the {+2} degree was a sideways correction, of the sort called a Flat in Elliott. Corrective waves tend to alternate, and if this holds true here, the wave 4 {+2} correction following the end of the present wave will be a Zig-Zag, a variety that tends to fall deeper.

Corrective waves also tend to terminate at one of the Fibonacci retracement levels. This is a tendency, not a requirement.

There is no way to estimate where wave 3 {+2} will peak. If today's high (so far) of $15.87 turns out to be the peak, then a major correction could carry HA down to the 61.8% retracement level, at $8.33.

Again, I'm talking tendencies and possibilities here, with a lot of guesswork. It is one of many possible scenarios for the correction.

The correction itself, however, will happen according to the Elliott wave rules.

Odds and Yields

HA has completed five bull signals since wave 3 {+2} began in April 2013. Three were successful, on average gaining 18.1% over 44 days. The two unsuccessful plays lost 2.8% over 19 days, on average.

The 60% success rate suggests that HA is averse to whipsaws, at the 15.3% win/lose yield spread means that when it does have a successful bull signal, it provides an outsized reward.

The Company

Hawaiian Airlines, headquartered in Honolulu, Hawaii, serves both local routes, between the Hawaiian islands, and long-range flights to the U.S. mainland and East Asia. It is the eighth largest commercial airlines in the United States.

I'll add that among the many airlines I've taken on my regular trips between the U.S. and Japan, I found Hawaiian to be by far the most pleasant of the U.S. carriers. (The Japanese carrier ANA is number one in my book.)

Analysts are rather unenthusiastic about Hawaiian's prospects, collectively coming down with a negative 14% enthusiasm rating.

The company reports return on equity of 18% but with a high level of debt that is double the amount of equity.

The earnings yield is 7.6%, compared to 2.48% for the 10-year U.S. Treasury note. The company pays no dividend.

Earnings tend to peak in the 3rd quarter, covering the summer vacation season. That quarter's earnings were up in 2011 and 2012 compared to the year-ago quarter but were down in the most recent summer report, the 3rd quarter of 2013.

The other quarters tend to be fairly dismal by comparison, with a loss in the 1st quarter of 2013 and again in 2014 marring the chart.

Earnings have surprised to the downside four times in the the last three years, with the others surprising to the upside.

Earnings growth estimates imply that a "fair" price for HA would be $27.14 a share, which would mean that the stock is undervalued by 42%.

The stock is selling for 13 times earnings but at a steep discount to sales. It takes only 38 cents in shares to control a dollar in sales.

Options are pricing in confidence that 68.2% of trades will fall between $13.78 and $16.94 over the next month, for a potential gain or loss of 10.3%, and between $14.60 and $16.12 over the next week. The implied range for the next year is between $9.89 and $20.83, for a potential gain or loss of 35.6%.

I've marked the month's range on the right-hand chart in blue.

Institutions own 92% of shares.

Hawaiian next publishes earnings on July 21.

Liquidity and Volatility

HA on average trades 769,000 shares a day and supports a wide range of option strike prices spaced a dollar apart, with open interest running from two to four figures near the money.

The front-month at-the-money bid/ask spread on calls is 16.7%, compared to 0.8% for the most-traded symbol on the U.S, markets, the exchange-traded fund SPY.

Implied volatility stands at 36% and has been been working its way lower from 52% since April 9. By comparison, volatility on the S&P 500 index is 12%.

Volatility is at the 28th percentile of its one-year range, meaning that long option spreads bought with a debit and expiring in October would have the best chance of success. However, the bid/ask spread on options is wider than I like and for my account, I would structure any trade as long shares.

Decision for My Account

I like this stock as a bull play, and given the wide bid/ask spread on the options, I'm inclined to structure the trade as shares under my longer-term rules. The chart is bullish, and the financials are good, except for the debt. Certainly, by most measures, it is a bargain at current prices.

I intend to open a bull position under my long-term rules today if HA is showing upward momentum in the half hour before the closing bell. If

As I finish writing, HA has in fact fallen below the breakout level, negating the bull signal. If it reverses and again shows upward momentum in the half hour before the closing bell, then I'll open the position. If momentum continues to falter, then I'll add HA to my Watchlist for future consideration.

-- Tim Bovee, Portland, Oregon, May 30, 2014

References

My shorter-term trading rules can be read here. My longer-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 shorter-term 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 decisions for his or her own account, and take responsibility for the consequences.