Monday, February 27, 2012

KMT: Industrial Fixin's

(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.)

Kennametal Inc. (KMT) makes specialized alloys and other high-end materials that other companies use in manufacturing, and also the sells the tools  used to manipulate those materials.

One way to think of it: Kennametal makes the fixin's so that you can bake the cake. And they'll sell you the spoon you use to stir the batter.

The company, headquartered in Latrobe, Pennsylvania outside of Pittsburgh, sells to a variety of markets -- airplane manufacturing, synthetic fertilizers for agriculture, auto-making, home construction, mining, paper-making, railroads. Kennametal is all over the map.

Kennametal's business is especially well positioned to participate in the economy's recovery because it covers so many sectors. The economy never moves as a single unit, but always with some parts speeding ahead as other parts lag.

By spreading its wings so wide, Kennametal is bound to find at least some of its markets to be profitable.

KMT had the second-most bullish chart of 19 added the Zacks top-buy list over the weekend. ADS was the champion for a second time (see my analysis of Feb. 8). FTK and GVA completed the final four.

KMT's most recent leg up began at $35.45 on Dec. 29, 2011 and pushed up to an all-time high of $46.73 on Feb. 17. From that point, the price has dropped down to today's low (so far) of $44.90 in a series of small-scale lower highs and lower lows.

Big picture, what I'm seeing is an attempt to break decisively past the pre-recession high of $45.61, set in October 2007.

The swiftness with which all stock prices collapsed in that era likely left a lot of money in stocks held at losing prices. Those are holdings people and institutions will be wanting to unwind as they become profitable again.

Once the unwinding nears completion, KMT can continue to rise if that is supported by current market opinion.

The financials suggest that the market will be looking kindly on KMT. Return on equity is 19%, which is getting into growth-stock territory, and long-term debt is quite low, at 19% of equity.

Institutions own 94% of shares, and yet the price remains quite reasonable; it takes $1.40 in shares to control a dollar in sales.

Average volume is 582,000 shares a day. The options inventory isn't extraordinarily large, with 10 strikes in the near-month of March,  The bid/ask spreads range from not-to-bad to larger-than-I-like.

Open interest is low. In the near month only one call strike has more than the single digits.

Earnings will be published on April 30, and the stock goes ex-dividend sometime in pay for a quarterly payout yielding 1.23% annualized.

Implied volatility is, in absolute terms, on the high side at 39%. However, it is trading at six-month lows. By implication, prices will close between $40.45 and $50.83 a month from now.

Decision for my account: I passing on KMT. The options liquidity is too low for my rules. I think it would be a fine stock to trade as shares in the hopes of holding for the longer term, but that strategy doesn't meet the needs of my account at present.

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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