Thursday, January 19, 2012

MEOH's meth means money

Methanex Corp. (MEOH), based in Vancouver, BC, is a leading supplier of wood alcohol to global markets. Their product is known to scientists as methanol -- that's where the company gets the "meth" in its name. It is used mainly to make other chemicals, mainly formaldehyde, and from there is used in manufacturing products from plastics to plywoods to paints.

So MEOH is a classic bottom-of-the-food chain company. It needs a lot of downstream companies to prosper and provide a market for its product -- broad customer base; a good thing -- and requires economies of scale to remain competitive in such a broad market -- giant company; also a good thing.

MEOH has the most bullish chart among 16 stocks added today to Zacks top ranking. The runners up are AME in 2nd place, CATM in 3rd and CZNC in 4th.

What distinguished MEOH among the final four was high volume during up-bars on the hourly chart. AME volume was uppity during both rises and declines. It's a very small difference, but volume counts. And when the decision reaches two closely matched charts, it is often a choice between intraday volume and flipping a coin.

(See my essay "10,000 Charts" for a discussion of my screening methods.)

MEOH has been on the rise since Dec. 29, 2011, with only one retracement -- a five-day fall following an upward gap. Altogether during the rise, the stock has gapped three times at the open.

Altogether, the price rose from $21.83 in late December to $28.31 at today's high so far. The price has since retraced from that level but remains above yesterday's close. (I'm writing shortly before 2 p.m. Eastern.)

Longer term, MEOH hit an all-time high at $34.90 in May 2011 that retraced about half of the distance from its Great Recession low to May's high. Today it moved back to the 23.6% retracement, a Fibonacci level that often represents resistance or support.

The story behind MEOH's rise is obvious. The global economy is recovering, and MEOH is part of that, re-opening shuttered plants and negotiating new supply.

And it's doing quite well, thank you very much, with return on equity of 13%, although that comes with a cost, a debt/equity ratio of 0.77.

The big money clearly expects more growth. Institutional ownership is 82%. The price has been bid up to 1.03 times sales, meaning there's no discount from parity.

So the numbers paint an optimistic picture for a liquid stock. The average volume is 463,000 shares.

The options selection is limited, with only seven strikes available in February, but with three-figure open interest on calls surrounding the at-the-money level, and four figures for one of the put strikes. The bid/ask spread is decent, running $3.30/$3.90 on the near in-the-money call.

The next quarterly dividend is due in March. Earnings will be announced Jan. 27 after the close.

Decision for my account: The option pricing really doesn't give me sufficient return for a bull put spread. So my choice is to buy call options at $390 per 100-share contract, or shares at $2,772 per 100. I've opened the long call position, with April expiration, because it gives leverage.

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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