Wednesday, January 25, 2012

EMN: Global chemicals

Eastman Chemical Co. (EMN), headquartered at Kingsport in eastern Tennessee, makes chemicals, plastics and fibers in nine countries, serving a global market.

It's an upstream company selling the stuff that others downstream use to make other stuff. I have mixed feelings about upstream operations. They tend to deal in commodity products, with little to distinguish one company from its competition. But they tend to serve very broad markets, since what they produce can be used in lots of different ways.

But that's the story. And my analysis is all about charts.

I selected EMN from 15 stocks added today to Zacks top rank. (See my essay "10,000 Charts" for a discussion of how I select stocks.)

The charts, for the most part, were pretty awful. It was difficult to choose between them in their badness. It was a case of choosing the lesser of evils. In other words, it was very much like voting in an American election.

So EMN is the best of a bad lot, and as such, it's not too bad. The price began its current rise from a recession low of $8.88 in March 2009, and since then has risen with only three major corrections, none of which set a lower low.

The stock peaked in late April 2011 at $55.36 and from there began a brutal correction that sent the price plummeting by September down to $35.26. It has since began a rather slogging sort of recovery.

The most recent push up began Dec. 19, 2011 at $35.68, and the rise has carried to today's high of $47.11 (so far).

On this chart, I like the momentum from December. There was a stumble over the past eight trading days, but that has been erased, in my view, by today's strong rise.

I dislike the fact that the price is moving through territory that it surveyed as recently as last summer. There may well be some distressed money still in the stock that will be looking to get out at the next available break-even point.

Also, volume dropped off sharply in mid-January, from 3 million shares on Jan. 13 to 1.3 million the next trading day, Jan. 17. And it has dropped pretty steadily in the ensuing six trading days.

A rise without volume lacks conviction. A rise without conviction often signals that the end is near.

The return on equity is pretty flashy for an industrial materials maker: 30%. That's growth stock territory. The debt/equity ratio is 0.84, much higher than I like to see.

Institutional ownership is at 78%, which is a respectable level but not an enthusiastic one. And the stock is cheap in terms of sales, with a price/sales ratio of 0.94.

Implied volatility is at 39%, the lowest level since December, and has been declining since Jan. 17, when it stood at 44%.

Falling volatility suggests optimism that prices will continue to rise.

The company announces earnings after the close on Thursday, Jan. 26. It pays a quarterly dividend, now yielding 2.2%, with the next ex-dividend date due sometime in March.

EMN has a decent selection of options, with nine strike prices for February expiration and three-figure open interest in the close in strikes. The bid/ask spread is quite narrow, $2.75/$2.85 for the at-the-money February call.

Decision for my account: I bought June calls on EMN today, with a $45 strike price. With earnings so close, this was incautious. But we're in an earnings season marked with optimism, so I'm trading with the zeitgeist -- admittedly, at my peril.

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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