Tuesday, February 28, 2012

CIOXY: Plastic in Brazilian pockets

(I'll be travelling in East Asia through mid-March, so I expect my filing schedule to become irregular as a result of timezone differences with New York.)

Cielo S.A. (CIOXY) is Brazil's largest credit-card network, with 57% of the market. Its next biggest rival, Redecard, is buying back all of its share and going private, leading to speculation that Cielo might do the same.

The president of Cielo has denied the rumors, but a buy-back would be good news for the shareholders if Cielo pays a premium, otherwise, not so much.

CIOXY had the most bullish chart of 21 added today to the Zacks top-buy list. Zacks in recent days has been taking a walk on the illiquid side, with a fine selection of stocks so thinly traded that I can't even discern the trend. Those illiquid stocks get unceremoniously rejected as I compare charts.

ANZBY was the runner-up in today's selection. CWEI and GNC completed the final four.

CIOXY began its most recent leg up at $25.72 on Dec. 20, 2011 -- well before the buy-back talk  -- and has risen with three minor corrections to today's high (so far) of $35.57.

That is an all-time high since the company began trading on U.S. markets in the depths of the recession.

Nice chart, but CIOXY has so many strikes against it, I scarcely know where to begin.

1) It is illiquid, with average volume of 75,000 shares.

2) Primary trading is abroad, so U.S. shares reflect trading that not accessible to me.

3) It is traded on the Pink Sheets, which is not usually a venue for serious stocks.

3) There is no financial data readily available (meaning on my brokerage screen).

4) The bid/ask spread on shares is 15 cents, which is huge in this day.

5) There are no options, and therefore, no way to hedge.

6) Analyst coverage is weak, with only three estimates.

Enough! Six strikes, and CIOXY is definitely out. I watched Moneyball closely enough to know that.

But a wise woman I knew always said, "If you can't say something nice, don't say anything at all." So let's find the nice in Cielo.

1) It may be illiquid, but it is active enough to show clear trends, and it has an excellent bull chart with the stock soaring into blue-sky territory.

2) The stock bid/ask spread is wide, but hey, 15 cents is only 0.42% of the current price. Perhaps it is a problem, perhaps it is mere nit-picking.

3) The stock will go ex-dividend sometime in March on a semi-annual payment worth 4.2% annualized.

4) It is a monster big company in Brazil, totally dominating its sector within an economy that is growing wildly.

5) Stocks added to the Zacks top-buy list tend to get a bump in the ensuing few months, so CIOXY's new presence on that list suggests that a rise above entry levels is likely.

Net strike count: One strike! Cielo may not be out after all.

Decision for my account: Well, this is agonizing. I hate the illiquidity of the U.S. shares, but I love the company story and the chart. I think the best way to play it is as a dividend capture, with a good chance of capital gains as well. I bought some shares for my account, although the transaction came with a stern reminder of what "illiquid" means: I negotiated on the limit price but ended up having to pay the asked to get a fill.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
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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