Wednesday, February 8, 2012

ADS: Absurd ratios

Alliance Data Systems Corp. (ADS) wants to connect with YOU!

The Dallas, Texas company runs private-label credit cards, loyalty programs, customer analytics, customer-loyalty consulting, email marketing (not the spam sort) -- you name it. If  you're a customer (and who of us isn't), ADS wants to help the places where you shop keep you coming in the door.

The chart is of the Cape Canaveral variety -- it looks like the trail left by a rocket launching from the Kennedy Space Center.

ADS hit its recession low of $22.76 in March 2009, and then took off, running through two periods of turbulence on its way to today's higher high of $117.39. The most recent leg up began Nov. 28, 2011 at $94.60.

ADS had the most bullish chart of 23 stocks added today to the Zacks top-buy list. (See my essay "10,000 Charts" for details of my screening methods.)

The financials are -- well, a little strange. Return on equity is 317% (that's right, three figures), and the debt equity ratio is 30.93.

Institutional ownership is listed at 124%. Yet the price is low. It takes only $1.83 in stock to buy $1 in shares.

To put it bluntly, the financial ratios are absurd.

ADS has a good selection of options, with 15 puts and 15 calls for March expiration, many of them with three-figure open interest and a couple with four figures. The bid/ask spread is quite reasonable. And the stock is liquid, with average volume of 796,000 shares.

Implied volatility is way low, at 24%, just six points above that of the S&P 500. If I were playing ADS, I would buy calls.

Next earnings is scheduled for April 23.

Decision for my account: I've bought calls on ADS, despite the financial ratios. I'm a short- to mid-term trader, so the financials generally don't have time to matter on my positions. However, given the absurdity of the ratios, I'll be accompanying my position with a tight stop/loss.

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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