Tuesday, January 11, 2011

CRUS Watch

Cirrus Logic Inc. (CRUS) is one of those potential earnings plays that maybe never should have made the list. The company's next announcement is scheduled for Jan. 27 before the open.

ppspfe trendpfe loc

At first blush, CRUS seems a perfect candidate for an earnings plays: A 33.6% return on equity that has risen for five straight years, and no debt to speak of.

It's true that revenues have risen in only one of five years, but they're projected to be up in the current year, and earnings per share have risen in three out of five years and are projected to rise again. It's a pretty trick to grow earnings during the depths of the recession.

The stock is reasonably priced, with a price/earnings growth ratio of 0.76, and it pays no dividends, which means that money is retained within the company and put to work, presumably for a 33% annual return, which should presumably be reflected in the stock price.

The price began its most recent leg up on Dec. 31, and has risen by 16.1%.

The stock is now approaching a major swing high set in July 2010 and is well off of the most recent swing low of Dec. 15.

Reversal Levels
  • $21.20, +16.6% (July 2010 swing high)
  • $18.18 --- You are here.
  • $16.51, -9.2% (20-day moving average)
  • $15.61, -14.1% (Dec. 2010 swing low)

The problem is, as an earnings play, CRUS isn't predictably surprising. It's more like your crazy old uncle who spends much of his time snoring on the couch, only to occasionally do things like walk into the house with a toy spider monkey in his pocket, or burst into passionate discourses on the value of locust meat as a green replacement for prime rib.

The most recent quarter saw a 2¢ negative surprise, the quarter before that a 1¢ positive surprise, and no surprise at all the three quarters before that.

The result? Price rises on both surprises, regardless of direction, and price declines on two of the three announcements where the company hit the consensus estimate precisely.

That's not stable enough for me to play CRUS for my account. Pure and simple. I like crazy old uncles. But I don't bet money on them.

If I were to play it, I'd be looking at a bull put spread expiring in February, short the $17 strike and long the $15, for a $45 credit per contract.

As a slow trade, a long-term holding, I don't like CRUS at all. It just spent seven years trading sideways, and moved to bear phase in October on the monthly chart, with confirmation.

Monthly chart
ppspfe trendpfe loc

Maybe the seven lean years will be followed by seven years of bounty, but I'd want to see more prophetic signs than I'm seeing now before committing my funds.

  • pps - Person's Proprietary Signal.
  • pfe trend - Trend of the polarized fractal efficiency line.
  • pfe loc - Location of the polarized fractal efficiency line.

Key to the PPS/PFE tables
pps bull phase
bear phase
pfe trend uptrend
no trend
pfe loc +100 and above
+50 to below 100
0 to below +50
below 0 to above -50
-50 to above -100
below -100

PPS/PFE Analytical Tools

The analysis uses the daily Person's Proprietary Signal (pps), developed by John Person.

This is a black box signals -- the "proprietary" means that Mr. Person knows how it works under the hood, and I don't. But it has shown a fair degree of success in identifying good entry and exit points, and I find it useful.

For confirmation, the analysis uses an indicator called the polarized fractal efficiency (pfe) technical tool. It uses the fractal math of Benoit Mandelbrot to measure how efficiently move between levels. The higher the efficiency, the more directional the price trend.

The math for the pfe is public knowledge, but it is well above my math knowledge, and so to me is also a black-box signal.

This is a relatively new technical tool, based on fractal math. Investopedia has only a cursory explanation. Wikipedia is silent on the subject. ThinkOrSwim has a fuller explanation.

PPS/PFE Trading Rules

These rules are very preliminary. I’m still trying to figure out how the polarized fractal efficiency signal works.

When Person’s Proprietary Signal (pps) is in bull phase, enter when the polarized fractal efficiency (pfe) line crosses the zero line in an uptrend trend) A pps signal and pfe uptrend have less strength but greater upside potential when the pfe location (pfe loc) is below +50, and greater strength but less upside potential when the pfe location is at or above +50.

When the pps in in bear phase, enter when the pfe trend crosses the zero line in a downtrend. The set up has less strength but greater downside potential when the pfe loc is above -50, and greater strength but less downside potential when the pfe loc is at or below -50.

How should the pfe line be treated when it has flatlined at either end of its range, around +100 or -100. My preliminary observations are that the price by then has had a large run and tends to present a picture of exhaustion. However, by the description of the pfe, a high level should indicate a continued strong trend.

This is something that I’ll figure out as I go along.

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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