Friday, January 13, 2012

GPC: After the Gap

Genuine Part Co. (GPC) is where you go when things break down and you need replacement parts, be it on your car, in your office, or on your industrial assembly line. So GPC makes more money when people and companies, reluctant to replace big-ticket items entirely, stretch them out to get a few more years of use.

From a story standpoint, if you expect a rapid recovery from the recent recession and a rise in durable goods purchases, then GPC is bad play. If you expect things to creep along in the doldrums for a few more years, then GPC will look fairly good.

The chart shows that GPC has been in a steady rise, from $24.93, since early March 2009, interrupted only by a period of sideways retrenchment from February to October 2011.

The most recent leg up began Oct. 18, 2011, at $53.60, up to a high of $63.31 this week, on Jan. 10. Since the peak the price has moved sideways for three days.

I selected GPC using a bracket on the 20 new additions made today to Zacks list of #1 ranked stocks. (See my essay "10,000 Charts" for a discussion of how I use brackets in stock selection.) The rest of the final four were TNB in 2nd place, AME in 3rd and TESS in 4th.

GPC's chart stood out because of its clear break, via an upside gap, above resistance, despite this week's ensuing stall. An intra-day decline, quickly retraced, on both Jan. 12 and Jan. 13 reached down, and covered the gap, increasing odds of further rise above the present micro-level congestion.

(I'm referring to the market lore that prices, after an upside gap, will drop down and "fill" the middle of the gap.)

However, what follows the gap is a puzzle.

The last three days of trading have shown lower highs, and the last two days reached lower lows than did the first day of the series. That's troubling to any expectations I might have for a breakout above $63.31.

The hourly chart over those two days shows a series of lower highs and more-or-less sideways lows, like a descending-triangle wannabe.

So it's a question of where I, as a trader, put the significance amid this contradictory evidence -- on the rise from mid-October? Or on the declining correction from this week?

This ambiguity is typical of today's bracket. Most of the 20 stocks had charts ranging from ambiguous down to bad, so if GPC is the pick of the litter, it was a litter filled with runts.

Financially, GPC is a fundamentalist's dream, with return on equity of 19% and a very low debt/equity ratio of 0.09.

And the price is cheap -- 80¢ of stock will buy a dollar's worth of sales. A bargain.

Institutional ownership is 73%, significant but not overly high. Perhaps it is the sector -- replacement parts doesn't have a cutting-edge image. Perhaps the cheap price is leading Big Money to say, "Stocks are cheap for a reason."

The stock is quite liquid, with average volume of 711,000 shares.

The selection of option strike prices isn't especially large -- only 10 strikes, $5 apart, for February, and the bid/ask spread isn't outrageously high, at $3.00/$3.70 for the nearest in-the-money call.

But open interest is better than on many stocks trading under a million shares, exceeding 1,000 contracts on three call strikes and exceeding 300 on three put strikes.

GPC's next earnings announcement is Feb. 21 before the open. The stock will next go ex-dividend in early March; the last quarterly payout was 45¢.

Decision for my account: I'm passing on GPC at this point. The lower highs and lower lows on the three-day micro-correction lead me to conclude that the next move could be in either direction. I'll reconsider this decision if the price breaks above $63.31, thereby setting a higher high, and accompanies that breakout with a higher low.

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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