Friday, February 24, 2012

NP: Paper products

Neenah Paper Inc. (NP) makes high-end papers for printing and the like, and also paper-based technical products, such as abrasives and medical packaging and tape.

The Alpharetta, Ga., company sells in 70 countries. It beat the analyst consensus by 8% when earnings were released on Monday.

Neenah had the most bullish chart among 19 stocks added to the Zacks top-buys list today. WIRE was the runner-up, followed by SOA.

NP began its most recent leg up at $16.08 on Nov. 28, 2011, and has risen without a break up to today's high of $28.26. The price remains well below the pre-recession high of $45.56 in May 2007, so the price is facing continual old resistance.

Personally, I rarely  focus on resistance more than six months old. But there are many traders who disagree with me on that. Since it is impossible to know for certain what motivates traders and where their resources are, the question of whether old resistance matters will never be resolved.

NP has return on equity of 16%, a respectable level, but has incurred significant long-term debt, about equal to its equity, in getting there.

Institutional ownership stands at 82%, yet the price of stock is on the low side. It takes just 60 cents in shares to control a dollar in sales.

The big problem I have with NP is liquidity. It averages only about 125,000 shares traded daily, a level low enough to produce a poor selection of options -- only seven strikes for March, most lacking open interest. The bid/ask spread is wider than I'm willing to trade.

So in my book, it's shares or nothing with this equity. Implied volatility is at a six-month low, at 33%.  Volatility implies prices will close between $25.47 and $30.77 a month from now.

Earnings will next be published on May 9. The stock goes ex-dividend sometime in May for a quarterly payout amounting to 1.71% annualized.

Decision for my account: I'm passing on NP because of the options spreads. Otherwise I like the stock. I'm fully allocated when it comes to shares, but if I had room, I would certainly tuck some shares of NP away.

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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