Thursday, January 5, 2012

PX: Gas with Big Biceps

Praxair Inc. (PX) is gas. Not just the whispy normal gas or the perfumed air of a spring evening, but hard-core gas, heavy industrial gas, gas with big biceps and an economic punch.

This Connecticut-based company's business of selling industrial gas and related equipment puts it in the enviable position of an Intel or a Microsoft when it comes to nitrogen, carbon dioxide, argon, rare gases and a long menu of others. PX makes the essential components that downstream industries absolutely require do their thing.

And there are a lot of industries downstream. The boilerplate from Reuters says that PX "serves approximately 25 industries, such as healthcare and petroleum refining; computer-chip manufacturing and beverage carbonation; fiber-optics and steel making; and aerospace, chemicals and water treatment."

I selected PX for analysis out of a 16-stock bracket where I compared charts in a single-elimination tournament looking for bullish patterns. (See my essay "10,000 Charts" for an explanation of how the bracket works.) I randomly chose the seeds from a group of 924 optionable stocks having average volumes above 2 million shares a day.

GILD was the runner-up, with PAYX in the 3rd slot and VIAB taking 4th place.

PX, like all the charts I've read these days, is bullish but with a lot of bearish issues in its recent past. Sort of like the Republican presidential candidate Newt Gingrich with that embarrassing photo someone dug up of him seated cozily next to uber-Democrat Nancy Pelosi.

So when PX claims the championship as the best bull chart on my bracket, it's all very relative. We're not talking about the best of the best here.

But there is a bullish case to be made, and perhaps it is best to consider plays whose bullishness is not yet burning brightly. Buy early and sell when everyone else piles in -- a good practice for any trader.

PX hit bottom late October 2008, at $47.40, and from that dark time traced an impressive rise, with only one major pause, up to $111.74 on July 7, 2011. Since then it has paused again, retracing nearly 38% of the 2008-2011 rise, and Nov. 28, began to recover. Today the price stands within 3.4% of  the high.

An old-school breakout-trader would wait until the price bumped above $111.74 before opening a position. Yet there is an alternative view that says, "Look, with options there's enough leverage so that 3.4% will produce a tidy profit."

I have a fairly short horizon in my own trading, so I tend to favor getting in before the breakout.

On a micro level, the price hit a higher high yesterday, Jan. 4,  but with a lower low than the prior day. Today , Jan. 5, it has pulled back to a (so far) lower high but also a higher low.

The price now, less than 90 minutes before the close, is down for the day, but it has pulled sharply above the day's low, meaning the sellers have been unable to prevail.

For candlestick pattern fans: Neither two-candle pattern qualifies as an engulfing or a harami, in my opinion. I think the short-body candles are insufficiently short.

Normally, I steer away from telling stories about stocks. I think they lead to obsession, and the Ahab syndrome, where traders chase good stories as though they were great white whales. Jim Cramer, honestly, is sort of a Capt. Ahab.

In the case of PX, however, some storifying might be appropriate. Because of its position upstream from so many industrial concerns, it is well positioned to benefit from the ongoing, molasses-slow recovery of  the American economy. As consumer markets recover, the added business demand will inevitably  defy the laws of physics and trickle up to PX.

PX has some good numbers, with a return on equity of 26% (growth stock territory). Debt/equity is 0.95 -- higher than I generally like -- but with interest on debt so low, it's a good time to borrow for purposes that will expand the business.

The stock is slightly overpriced, with a price-to-sales ratio of 2.95. That means a long trader is paying three times the price that can justified by sales. But that's not too far out of line for a stock seen as having a profitable future.

Institutional ownership is at 88%, so clearly some big guns out there are taking an interest in the potential for a profitable future.

Calendar items: PX announces earnings on Jan. 25 before the open, land last went ex-dividend on Dec. 2. The amount of the quarterly dividend was 50¢.

Decision for my account: I've opened February bull put spreads, short the $105 strike and long the $100.

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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