Thursday, January 12, 2012

VAL's Blue Sky Flight

Minneapolis-based Valspar Corp. (VAL) is world's sixth-largest manufacturer of paints and other coatings. As such, it is a fine example of a sector that lies behind a broad array of industrial and consumer products. As the world's economy recovers (And it will! It will!), the recovery will create an environment where VAL can profit.

The chart drew my attention because of the steadiness of its rise.

The price began its upswing in early August 2011, at $27.44, and peaked today at (so far) $41.63. The price has had corrections within that five-month span, but even the corrections have had an upward tilt.

The most recent leg up began Dec. 15 at $36.17.

I chose VAL using a bracket of 16 stocks selected at random from a universe of 67 issues -- the new additions over the last three days to the Zacks #1 list. (See my essay "10,000 Charts" for a description of how I use brackets to compare charts.)

IHS came in 2nd in the bracket, CRUS was 3rd and XOMA was 4th.

The case for VAL's chart was helped by the fact that, on the weekly chart, VAL has broken clear this week of the previous highest high of $40.60, set in early April 2011. This puts the stock into blue-sky territory, as it has never before traded at these levels.

I must confess, I have a huge weakness for blue sky stocks. There is no upside resistance, and I think that fact increases  the odds in favor of a profitable trade.

Zacks has mixed financials. The return on equity is 17% -- on the high side, although below growth-stock territory -- but the debt/equity ratio is 0.56, which is a bit more debt than I like to see.

The debt isn't a deal-breaker, however. Interest rates are low, and the company has taken advantage of that to do some acquisitions abroad, as well as to sell some of its own assets. So as long as the money is being put to uses that will grow the bottom line, what's to worry.

Institutional ownership is 72%, so the big money, although not wildly enthusiastic, doesn't seem to be afraid of VAL's prospects.

The average volume of 684,000 shares provides good liquidity, but that hasn't translated into a fine selection of options, and that poor inventory limits the things that a creative trader can do to increase profits.

There are just eight strike prices, $5 apart, for February. The only strike with large open interest -- 1,035 contracts -- is the just in-the-money call options, suggesting that traders expect the price to rise and are buying calls for some leverage as they go along for the ride.

The spread is on the wide side -- 75¢ for the nearest in-the-money call.

On the calendar -- VAL announces earnings on Feb. 14, before the open, and the next ex-dividend date isn't expected until spring.

Decision for my account: I bought shares in VAL today. I decided not to do options because of the limited selection, a rather wide spread, and the concentration of open-interest in a single call strike. If the stock heads down, there will be a panic out of those calls, and no one -- NO ONE -- will want to buy them.

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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