MOFG: Regional bank

MidWestOne Financial Group Inc. (MOFG) operates banks in 15 counties in central and east-central Iowa. The company is headquartered in Iowa City.

So, regional bank, doing bankly things, part of the regional banking sector, which is something of the flavor of the month when it comes to financial companies. The idea is that the regionals were more conservative during the bubble years prior to the recent recession, and so are in much better shape than their larger cousins to profit from the recovery.

MidWestOne had the most bullish chart among 19 stocks added today to the Zacks top-buy list.

On the chart, the most recent leg up began at $14.50 on Dec. 28, 2011 and has continued without a break up to today's high of $19.35. Notably, the stock weather Thursday's intra-day drop and recovery in the broad markets by skipping the drop part. The price came through unscathed.

The price today pushed to an all-time high, eclipsing the prior record set in 2008, when the company went public. Talk about bad timing: The price ended up down in the first month of trading, and stayed below its opening-month high for four grueling years.

Return on equity amounts to 8%, which puts MidWestOne in the tortoise column. Long-term debt amounts to 46% of equity, which is higher than I like but is actually fairly low for a banking company.

Institutitions aren't heavily invested in MOFG, owning just 19% of the shares. Even so, the price has been bid up to the point where it takes $2.57 in shares to control a dollar in sales.

Earnings have shown a steady rise since the end of 2010 with only two exceptions, the most recent being the most recent quarterly report.

The main point to be noted about MOFG is that it is small. Volume on average is only about 4,500 shares. Market capitalization is only $163.7 million.

It has no options. The half-hour intra-day chart shows some half hours where the volume is zero.

So this would be a shares only trade, and one only for traders who are able to tolerate low liquidity. This generally means traders who plan to be in the position for the long haul. And certainly, for traders willing to dig more deeply into the financial statements than I have done.

Decision for my account: I love the chart, and the financials are OK if a bit underwhelming. But I am not a long-term trader, and this stock is too illiquid for my taste. I shall pass on the trade.

Methodology

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.

Disclaimer

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.

One of those days...

This is the kind of day that tries a trader's soul.

The day opens with a sharp decline, and then rebounds, but in a sickly manner.

The financial media's narratives of the day make little sense: Down on worries about Europe's economy. Or China's. Or Colony Newt's on Mars. Or weekly jobless claims.

The new additions to Zack's top-buy list are headlined by AAPL, which everyone loves, me included, but the other 15 stocks have charts that I wouldn't wish on my worst enemy.

Basically, it's one of those days when I look at the charts, throw up my arms, and walk away through the rain to my favorite coffee haunt in Portland, Oregon's Hollywood District, to drink some fine brew, check out the new art, listen to some good sounds, thumb through the socialist newspapers on a stand near the cash register, and watch other people doing the same.

There is no point whatsoever in trying to make sense of a market when it is one of those days. And so I won't. Till tomorrow!

GPX: Capturing tribal knowledge

GP Strategies Corp. (GPX) provides training to help workers do their jobs better, increasing performance as a way of making their company more competitive. The instructional programs focus on sales and technical training,

My favorite bullet point in GP Strategies' mission tasks, from their website: "Capturing your organization's tribal knowledge to support your continual competitive environment."

Tribal knowledge? Sort of a Lord of the Flies strategy?

It's an odd concept, but large organizations really do function like the tribes and clans of our ancestors. We human beings are not so far from the stone age as we might think.

Headquartered in Elkridge, Maryland, GP Strategies operates mainly in the United States and the United Kingdom but has outposts in Latin America, continental Europe and South and East Asia.

GPX had the most bullish chart among 22 stocks added today to the Zacks top-buy list.

The GPX price has been in an uptrend since early 2009. The most recent leg up began Oct. 4, 2011 at $9.16 and has risen with three short-lived corrections to Tuesday's high of $17.60.

Long term, the price is well below its all-time high. It faces possible resistance at $19.13 and $23, both highs set in the 1990s.

Fundamentally, the first thing to be said of GP Strategies is that it is a small company, with market capitalization of only $329 million. Average volume is only 45,000 shares, and it has no options.

So this would be a shares-only play with no possibility of insurance and all the risk associated with a small-cap company engaged in providing a consulting service.

Within that risky world, GPX has done well for itself, with return on equity of 13% and no long-term debt. Institutions own 81% of the shares, so there are some smart people out there who see profit in the company. And the price remains relatively cheap -- it takes 98 cents worth of shares to control a dollar in sales.

Comparing quarter to year-ago quarter, earnings have been accelerating for the past three years, although within a year earnings have tended to hop-scotch a bit. I'm presuming that's due to seasonal factors influencing corporate training schedules.

Next earnings will be published on May 3.

Without options it is impossible to talk about implied volatility. The average daily price fluctuation is 2.4%. The price fluctuates 40% more widely than does the S&P 500.

Decision for my account: I like the chart, despite the antique resistance. Certainly the price hasn't faltered when it has encountered lower resistance levels from long ago. The financials are exemplary. However, I'm rejecting the trade for my account because shares alone provide insufficient leverage to make it worth my while. Also, the lack of options makes it impossible to do a covered call play, which cuts off GPX as a source of monthly income.



Methodology

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.

Disclaimer

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.

HOG: Roarin' back

When I write about Harley Davidson Inc., I'm always tempted to come up with something like, "HOG is roarin' back in the marketplace..."

But that would be so hackneyed and stale, so I won't write anything like that.

America's premier motorcycle manufacturer Harley had the second most bullish chart among 20 stocks added today to the Zacks top-buy list.

HOG is one of those stocks that falls in and out of favor with traders. It tends toward choppiness, but like most stocks it has been on the rise since its recession low of 2009.

The most recent leg up began Dec. 14 at $36.06, and the price hit a new higher high today of $50.96. The rise was interrupted by a three-day correction in early March and a seven-day correction in mid-March.

A confession: I have to be very careful about trading stocks like HOG. Based in Milwaukee, Wisconsin, HOG is an American icon, part of the mythic landscape that helps knit this diverse country together. So I find that I have a slight bias in favor of opening positions.

So I shall put on a stern, judgmental face as I look at HOG and will try to set aside the admiration I have for those big, noisy machines.

Harley's return on equity is 24%. That's growth-stock territory in my book. But the company carries a heavy burden of long-term debt, 2.4% times equity. That debt is bound to lessen the company's ability to weather downturns and to seek new opportunities.

Institutions own 79% of the shares and have helped bid up the price so that it takes $2.19 in shares to control a dollar in sales. Earnings have been fairly choppy over the past couple of years. There is none of the smooth acceleration that a long-term investor like Warren Buffett likes to see.

But of course, we're not long-term investors here. We're private traders, grabbing opportunities when they're good and letting them go without a farewell when they falter. That's one reason why I rarely discuss earnings. They're not germane to what I do.

The chart itself is more a cause of caution. From a very long term perspective, HOG is entering a period of congestion that marked the extended top from 2000 to 2006 before the dismal crash to a recession low.

How much money was left behind in HOG during the fall? No one knows, but it is certain that as those shares become slightly profitable or at the least a wash, those investors will be looking to get out, making further price rises difficult to attain.

The stock is also breaking past a 2008 sucker rally that may have drawn more money into HOG that was then left invested when the stock, in three months, lost four-fifths of its value.

When I hear chart-readers talk about such long ago resistance, I have a tendency to roll my eyes. But those levels on the chart are the wreckage of a financial disaster of epic proportions, and it is hard to walk through ruins without stumbling.

That's not to say that there is no money to be made in HOG. It just means that as a trader, I will tend toward caution in my exits based on the long-term chart alone.

Average volume is 1.8 million shares. HOG has a wide selection options with strikes a dollar apart, high open interest and narrow bid/ask spreads.

Implied volatility at 33% is five points above the January low but still well below where it stood in December. That level provides a 68.2% chance that the stock will close between $45.19 and $54.85 a month from now.

Next earnings will be published in July. The stocks goes ex-dividend in May for a quarterly dividend yielding 1.24% annualized.

Decision for my account: I've opened a long (bull call) vertical spread on HOG, with August expiration, long the $45 call and short the $50, with a risk/reward ratio of about 7:10. This setup is heavily skewed toward the upside, so I'll have to nimble about exiting if the price doesn't rise. The skew is caused by the option inventory for August, which has a $5 gap between the $50 at-the-money strike and the next higher.



Methodology

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.

Disclaimer

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.

TCBI: Regional banking

Texas Capital Bancshares Inc. (TCBI) is a regional banking company headquartered in Dallas, Texas. There is little to be said about it as a business. It's a bank. It lends money. It stresses its service. It backs entrepreneurs. The photos on the website look vaguely Texan.

End of story.

Texas Capital Bancshares had the most bullish chart among 20 stocks added today to the Zacks top buys list. However unexcited I may be about regional banks, there are some analytical models floating out there that obviously like TCBI a lot.

It isn't a far-flung banking empire by any stretch. The company has a dozen banking locations around Texas, eight of them accounted for by three metro areas: Dallas-Forth Worth, Houston and Austin.

So what has gotten the algorithms all excited about TCBI?

First, regional banks are sort of the flavor of the week. A couple of headlines from the past eight hours: "Regional banks ready to rally" (CNNMoney), "Regional banks on the upsurge as profits surge and loan books improve" (MarketWatch).

Second, Texas Capital Banshares' return on equity of 13% shows that it reinvests its earnings more efficiently than 93% of all regional banks.

Banks always have high debt/equity rations, and TCBI is no exception: Long-term debt is triple equity.

Institutions nearly all of the shares, and the price is high, requiring $4.03 in shares to control a dollar in sales.

Accelerating earnings in all but one of the past 11 quarters surely must also be a factor.

On the chart, the most recent leg up began Oct. 4, 2011 at $21.70 and has since risen to Monday's high of $36.61. The price moved into blue-sky territory last December.

So what's not to like? One aspect is common to all small regional banks: They're small and regional.

There is a degree of safety in financial institutions spread across many states, where a downturn in the auto industry, for example, won't necessarily cause much harm to the bottom line.

A small regional has much less diversification. As goes Texas, so goes TCBI.

A second aspect is market liquidity. Average volume is 369,000 shares. That produces a small options inventory with little open interest and wide bid/ask spreads. That's another way of saying that TCBI is expensive to trade, and once I'm in a position, it may not be easy to get out.

Implied volatility, at 39%, is at all-time lows, suggesting that any position I would open on TCBI should be net long. That levelof volatility provides a 68.2% chance that the price will close between $31.06 and $38.86 a month from now.

Next earnings will be published in July.

Decision for my account: I'll be passing TCBI because of the low liquidity. And as I hinted above, I just have misgivings about small regional banks. In terms of the chart and the financials, however, there's nothing not to like.



Methodology

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.

Disclaimer

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.

Dit BUD is voor u!

Dit Bud is voor u!, says American beer icon Anheuser-Busch InBev NV (BUD) from its headquarters in Leuven, Belgium. Illustrating yet again that in the early 21st century, all icons are global and "Buy American" is an effervescent goal.

Anheuser-Busch in more than Bud and Stella Artois, of course, of course. The company's stable of brews also includes Skol, Brahma, Quilmes, Michelob, Harbin, Sedrin, Klinskoye, Sibirskaya Korona, Chernigivske and Jupiler.

BUD had the most bullish chart among 12 companies added over the weekend to the Zacks best-buy list.

The price began its present uptrend in September 2011 at $49.08 and has since traced a steep path up to today's high of $73.46, an all-time high. BUD moved into blue-sky territory on March 9, topping the prior highest high of  $69.28.

BUD has return on equity of 16% -- a respectable level that is marred by long-term debt due mainly to aquisitions that is equal to 107% of equity. That debt is not necessarily a deal killer, of course. I'm not looking to BUD as a long-term buddy. And even if I were, if the company has the ability to turn its purchase into profits, then that's good for the shares price.

The company's principal market presence is on the EuroNext exchange under the ticker symbol ABI. That's where the serious institutional money will mainly go. The New York Stock Exchange presence has only 4% institutional ownership.

The chart itself has the jumpiness common to American depository receipts (ADRs) whose price tracks trading on foreign exchanges.

The price is on the expensive side. It takes $2.95 in BUD shares to control a dollar in sales.

With average volume of 1.3 million shares, BUD has a fair selection of options, very few of which have open interest. (It's an ADR, after all.) Those that do have open interest tend to be in three figures on the call side, two figures on the puts.

Bid/ask spreads are tolerable, perhaps a bit wider than I like.

Implied volatility is at all-time lows, at 24%, giving a 68.2% chance the price will be between $68.17 and $78.17 a month from now.

Decision for my account: I've opened a long (bull call) vertical spread on BUD with September expiration, long the $72.50 call and short the $75. The risk/reward ratio is about even, at 13:16. 



Methodology

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.

Disclaimer

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.

The Week Ahead: Health Care

Tradition says the most influential report of the week will be the 4th-quarter gross domestic product final on Thursday.


But I would argue that the big event of the week is political: The Supreme Court's three-day hearings into legal challenges to the health-care reforms proposed by President Obama and passed by Congress in 2010.


The questions posed by justices will give the first hint regarding their thinking on the issue, and we can bet that the pundits and crystal-ball gazers will be out in full force with commentary.


Health care spending accounts for 18% of the American economy. The purpose of the reforms was, among other things, to get health-care spending under control. If the law is struck down, the lack of health-care spending controls will have a depressing effect of economic activiity and will increase the dififculty of balancing the federal budget.


So the court's opinion will matter -- if not immediately then down the road -- and the hearing will at the least provide a broad undercurrent to traders' assessment of future market prospects.


The hearings are scheduled for Monday and Tuesday at 10 a.m. Eastern, and Wednesday at 10 a.m. and 1 p.m. The court is expected to issue an opinion in June. Transcripts and recordings will be released by 2 p.m. Monday and Tuesday, and by 4 p.m. on Wednesday.


Politics aside, there are four major reports scheduled for the week.


Durable goods orders, released Wednesday at 8:30 a.m., tracks purchases of big-ticket items -- the sorts of things that are on the capital budget. It is an indicator of business confidence, and also future manufacturing.


GDP, at 8:30 a.m. Thursday, is the final and, in theory, most accurate assessment of business activity in the fourth quarter. A surprise here would be unusual, but should it happen, it would be impactful.


Weekly jobless claims, also at 8:30 a.m. Wednesday, are the most timely indicator of how the always important job market is faring.


Personal income and outlays, at 8:30 a.m. Friday, tracks how much we're getting and how much of that we're spending. Subtract the spending from the getting, and the result is the saving. Some economists say a high savings rate, as worried consumers sock it away rather than shopping till they drop, is a major cause of the slow recovery from the recent recession.


Lesser reports of interest: 


Monday: Pending home sales at 10 a.m. and the Dallas Fed's survey of manufacturing at 10:30 a.m.


Tuesday: The S&P Case-Shiller home price index, which tracks prices in 20 metro areas. Housing markets are local, and I consider this report to provide the best insight into what's really happening in housing. Also, consumer confidence from the Conference Board at 10 a.m.


Wednesday: Petroleum inventories at 10:30 a.m.


Friday: The Chicago purchasing managers survey (As goes Chicagoland so goes the Nation!) at 9:45 a.m. and consumer sentiment from the University of Michigan at 9:55 a.m. 


Fed Chairman Ben Bernanke addresses the National Association for Business Economics on Monday at 8 a.m., and on Tuesday, at 12:45 p.m., he gives another in a series of lectures at the George Washington School of Business.


Two other members of the Federal Open Market Committee, Philadelphia Fed Pres. Charles Plosser and Richmond Fed Pres. Jeffrey Lacker, are on the speaking circuit.


Plosser, a member of the Gang of Three dissident Fedsters who voted last year against expanding the money supply, speaks Monday at 7:30 a.m. and Thursday at 1 p.m.


He has had institutional ties to Chase Manhattan Bank, Eastman Kodak Co., Wyatt Co., ViaHealth Inc., RGS Energy Group Inc. and Chase Manhattan Bank, all in consulting or advisory capacities. He also co-chaired the Shadow Open Market Committee, which second-guessed the Fed’s monetary policy.


Lacker, who in January dissented over an expansion of the Fed's openness, voting against a statement that the FOMC would keep rates low into late 2014, speaks Thursday at 6:45 p.m. He taught economics at Purdue University before coming to work for the Richmond Federal Reserve Bank in 1989.


Two FOMC alternates will also speak.


Boston Fed Pres. Eric Rosengren speaks Tuesday, and St. Louis Fed Pres. James Bullard on Wednesday.


Both came up through the Fed system. Rosengren has expertise in the Japanese banking system.


All of the Fed speakers, including Bernanke, took office under President George W. Bush.



By my rules, as of Monday I can trade April diagonal, butterfly, calendar and vertical spreads, iron condors and covered calls, and July single options and straddles. Of course, shares are good at any time.

Good trading!

FMCN: Ads for the eyeballs of China

Focus Media Holding Ltd. (FMCN) runs an interactive digital media network from its headquarters in Shanghai, China. That's a fancy way of saying sells advertising on its liquid crystal displays. Think "Times Square" and you'll get the picture.

Then think "China" and you'll get an idea of the scale.

Focus media has about 170,000 LCD displays in more than 90,000 commercial buildings in 90 cities. That's a lot of potential eyeballs to trade for advertisers' dollars.

Back in the days of classical Western imperialism (as opposed to the present neo-con variety), businesses sought their fortunes providing oil for the lamps of China, the reasoning being there were lots of Chinese people and so they had a lot of lamps, and that means lots of oil.

Focus Media Holding's business model, ads for the eyeballs of China, follows the same reasoning, but with the added advantage of being a home-grown company, not an imperialist interloper.

FMCN was one of eight companies added today to the Zacks top-buys list. Only two of the companies had any degree of liquidity, and FMCN had the best chart of the two.

I say "best chart", but it is a struggling chart. FMCN's big picture (like every other company on the face of the globe) is a zig-zag from a pre-recession peak to a shocking recession low, and then a recovery that faltered in November 2011 and then resumed its rise.

Where FMCN differs is that its post-low recovery has been weaker than many, as has its post-falter rise.

Momentum traders, always seeing the glass as half empty, will theorize that the weakness is a fatal flaw. Value traders, seeing the glass as half full, will exclaim, "What a bargain!" and try to find a reason to buy.

The resistance ladder looks like this: The post-recession high, before the November falter, was $37.58 in May 2011. The falter, stairstepping down, reached a low of $14.80 in November 2011. (Actually, the low was $8.79 in a one day downward spike and retracement that I'm rejecting as an outlier.

The post-falter high of $30.08, recorded on March 20, pushed above the level of a failed reversal attempt  on Nov. 18 that peaked at $28.60 before tumbling downward with a gap. The present breakout also failed, not with a tumble but with an orderly retreat back below $28.60, and the price is again trying to break above that level.

Other significant resistance levels are $32.93 from September 2011, $34.51 from August 2011, and of course the post-recession high of $37.58.

None of this promises a smooth ride up, but neither does it preclude a rise. It just means that the trader will be required to use the position management skills that we all ought to be using under any circumstances.

FMCN has a return on equity of 16% -- respectable although not growth stock territory. Long-term debt is quite low, amounting to only 8% of equtiy.

Institutions own a bit over half of the shares and have bid up the price to an expensive level; it takes $4.77 in shares to control a dollar in sales.

Focus Media Holding carries with it a degree of news risk. Last fall a report from Muddy Waters Research accused Focus of  "fraudulently overstating" the number of screens in its network by about half.

About 2.2 million shares of FMCN's U.S.-listed shock are traded daily, on average. That liquidity supports a wide selection of options with three- and four-figure open interest and relatively narrow bid/ask spreads.

Focus next publishes earnings on May 24. The stock goes ex-dividend on March 28 for a quarterly payout returning 1.9% annualized.

Implied volatility is at historic lows, at 0.60, implying a 68.2% chance that FMCN will close between $23.85 and $33.77 a month from now.

By the standard playbook, that low implied volatility suggests I should have a net long position in FMCN -- an options spread, for example, that decreases in value as time passes (theta-negative).

On the other hand, with so much resistance, if the price stalls then I want a net short options position, something that gains value as time passes (theta-positive).

One way to play it would be as an iron condor -- a theta-positive construction involving calls and puts at four strike prices. Here is Wikipedia's discussion of the iron condor. The iron condor profits as long as the price remains within a range, and a breakout below or above that range turns the position to losses.

FMCN's resistance ladder suggests that range trading is a strong possibility, and even suggests where the range should be placed, consistent with the implied volatility month-out levels.

I see it as an iron condor play with April expiration, a $33 strike for the high end of max profit, which is above the next higher resistance level, and $26 for the low end, which is at the middle of the most recent near-term stall point.

That gives net credit amounting to about a 22% return on risk. Not too bad.

Decision for my account: I've opened an April iron condor on FMCN, short $33 call and the $26 put, with the wings $2 out on either side.



Disclaimer

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.

Diagonals for April

I've put my diagonal spreads for April expiration in place, both the diagonals themselves and a measure of insurance against catastrophic declines.

Diagonal spreads are the parsimonious trader's covered call. Rather than buying stock (expensive!) and selling near-month calls against the shares (low percentage return!), the diagonal trader buys call options with expiration a few months out (cheaper!), and sells near-month calls against the contracts (higher percentage return!).

Both covered calls and diagonals have their good points and bad.

With a covered call, I'm never forced to sell my shares and take a loss in the case of a price decline. I can hold on forever, or at least until buy out or Chapter 7 bankruptcy do us part. But shares cost a lot of money compared to options -- shares are unleveraged -- and that reduces the diversification of my holdings, and also lowers my profits as a percentage of investment.

With a diagonal, I'm exposed to the peril of time decay. The long call in my diagonal spread will lose value as it near expiration and will eventually cease to exist. A diagonal forces me to take my losses, even if I think waiting a few months would allow me to recoup. Yet call options are cheaper than shares -- options are leveraged -- and that allows for greater diversification of my holdings and raises my profits as a percentage of investment.

My method of selecting diagonals is as follows:

• For the long option, go at least three months out from the near-month expiration and buy calls with delta as close to 70 as possible. (Delta measures how much an option moves in relation to stock price moves. A 70 delta means that if the stock gains $1, the option gains 70 cents.)
• For the short option, sell near-month calls with a delta between 30 and 40.
• Close the diagonal -- sell the long call -- a month out from expiration, thereby avoiding the greater part of time decay. For example, a diagonal with July expiration will be closed off of my books in mid-June.

That method allows me to sell near-month calls at least three times against the out-month long call, and more if the options inventory requires me to further out than three months for the long calls.

Since diagonal calls depend upon the passage of time for its profits, there is little to be gained from trading  in and out as in a directional trade. So I insure my positions by buying protective puts, priced in such a way as to cost about a third of my potential profits. Generally, for insurance, I'm looking at puts having a delta of negative 30, so as to reduce the number of contracts and my transaction costs.

It's not 100% coverage, but it will mitigate potential losses. And since the puts expire the same month as a long call, odds are good that I'll get a portion of the premium back.

In selecting options, I want choose from stocks having high liquidity -- average volume of 5 million shares or more. I want to structure the position so that my risk/reward ratio -- maximum potential loss from the sale of calls divided by max potential profit from their sale -- is 4:1 or less, and within that group, I select for the highest return.

This produces surprisingly few possibilities. For my own account, I also add analyst opinion to the mix. I give priority to stocks ranked top buys by Zacks.

Here are my out-month long-call holdings (with expiration month and strike) against which I'm selling April calls:

• AAPL, July $540
• DFS, July $29
• EFA, June $51
• INTC, July $26
• IWM, June $77
• QCOM, July $60
• QQQ, June $60
• STX, Sept. $24
• WDC, July $35

The three exchange-traded funds -- EFA, IWM and QQQ -- were added to the mix when I was setting up for March expiration, using a different method than I used for the April selection.

Some math tools:

Maximum risk is the cost of the long call minus the price received for selling the short call. It is the net debit paid for the position.

Maximum profit is the strike price of the short call minus the strike of the long call minus the maximum risk (net debit).

Risk/Reward ratio is the maximum risk divided by the maximum profit. I generally round it and display in ratio from as n:1 (4:1 or 2:1).

Bottom line: The diagonal is a complex beast, at the mercy not only of time decay but of implied volatility. Rarely will a position show maximum profit or fall into maximum risk. For my own account, although I like the stability and simplicity of covered calls, the leverage afforded by diagonal spreads is too attractive to pass up.

Some reading:

• OptionsVest
• ThinkOrSwim

By the way, why no stock analysis today? 

Zacks added only five stocks to its top-buy list, and I hated them all. My daily random selection for analysis from a pool of 675 large-cap stocks turned up little to cheer about.

The shrinking pool of bullish possibilities may suggest a weakening of the markets in advance of a major turn. Or not. I'm still pondering that prospect.

In the meantime, my time-dependent positions -- my diagonals -- are well insured.

Methodology

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.

Disclaimer

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.

EC: Epic risks

Ecopetrol S.A. (EC), headquartered in Bogota, is engaged in the full range of oil and natural gas operations, mostly within its home country, Colombia. Owned by the government, it is the largest company in the country, with 5,048 miles of pipeline.

EC had the most bullish chart of 11 stocks added today to the Zacks top-buy list.

(I also a analyzed 16 charts selected at random from 675 large-cap stocks. MDY was the most bullish, but the charts were so poor on most of the issues that I've decided not to do a full analysis.)

EC's daily chart chart shows a steady rise from $41 on Nov. 28, 2011 up to $61.56 on March 13. The price moved into blue-sky territory in February, breaking out into record highs.

However, since the most recent highest high, the stock has pulled back in a classic downtrend: A low, a lower high of $61.16, and today's lower low of $58.91. At a minimum, it would take a close above $61.16, followed by a reversal above $58.91, before I would consider the uptrend to be back in operation.

Ecopetrol on the books is a growth stock, with return on equity of 34% and long-term debt amounting to only 15% of equity.

Despite Ecopetrol's great financials, the company comes with epic risks.

Institutional ownership is quite low, at under 2%. Perhaps that is due to concerns about the stability of the country's government, which has been engaged in a low-intensity civil war, sometimes with U.S. backing, since 1968 by some reckonings, and since 1948 by others.

The conflict has in part been political, and in part, commercial, as drug lords violently protect their trade.

That giant, glowing exclamation point floating above your screen is a warning. Ecopetrol has the risks common to the oil game -- administrative decisions made in Saudi Arabia and Russia can have outsize impact on the company's performance. Added to that, it has the domestic politic risk of nationalization, warfare against its infra-structure, and assassination of its key personnel.

There is also a history of corruption in Colombia, and who knows how that spills over into the price of Ecopetrol stock on its home exchange, the Bolsa de Valores de Colombia. The price on U.S. traded shares has been bid up to the point where it takes $3.92 in shares to control a dollar in sales. Go figure.

EC shares traded in the U.S.  have a bit less liquidity than I like. Average volume is 624,000 shares.

The stock's options inventory is sparse, but with triple-digit open interest clustered around the at-the-money level in the out-months. The bid/ask spreads are wide.

Decision for my account: I identified three risks associated with EC -- war, petrol-politics and corruption. That's too rich a brew for my account, so I'm passing on the trade. If I were to trade, it would be as shares, and I would wait at a minimum for a new higher high in the very near term, above $61.16.



Methodology

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.

Disclaimer

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.

AAP: All the parts in place

Advance Auto Parts Inc. (AAP) sells after-market parts for cars, vans, SUVs and and light trucks, targeting people who like to get down and greasy under the hood, either on their car or someone else's for money.

The Roanoke, Virginia company operates more than 3,500 retail stores in the eastern and midwestern U.S., Puerto Rico and the Virgin Islands.

AAP had the most bullish chart of 16 stocks selected at random from 675 large-cap companies. FTI was the runner up. ETN and VIV completed the final four.

The AAP chart began its current rise on Jan. 4, 2012 at $69, moving quickly into blue-sky territory where it has remained ever since. An upside earnings surprise in mid-February resulted in a $4 gap, helping to propel the price up to a highest high of $89.50 on March 16.

The price immediately drew back from that level but is again approaching a fresh breakout.

The prudent trader will wait for a persistent break above $89.50. Traders with confidence in their position management skills will go in now to capture any explosive breakout to the upside.

The company is certainly a money-maker, with a return on equity of 42%, but with long-term debt amounting to 49% of equity, quite a high level.

Institutions own 94% of shares, yet the price is near parity with sales. It takes only $1.05 in shares to control a dollar in sales.

The analyst consensus rates AAP a moderate buy, meaning it is expected to outperform the market by a bit.

Bottom line: All the parts are in place for this stock. The only downside, a very slightly, is liquidity.

Average volume is 883,000 shares, and that results in slightly wider bid/ask spreads on the options than I like. Three-figure open interest is clustered around the at-the-money mark and rapidly trails off to zero as the strike price moves away in $5 increments.

Implied volatility is at historic lows, suggesting that any position I were to open should be long.

That means theta negative, in options parlance: I should open a position where time decay decreases the value, especially in the last month before expiration.

The reason for that seemlingly counter-intuitive tactic is that to buy a position is to buy volatility, and as with anything else, a trader wants to buy low and sell high. Implied volatility is way low, and in theory it will at some point revert to the mean by rising.

The implied volatility provides a 68.2% confidence that the price will close between $82.77 and $95.23 a month from now.

Decision for my account: I've opened bull call vertical spreads on AAP, for a net debit, going long the $85 call and short the $90 call. The position expires in September.


Methodology

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.

Disclaimer

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.

NVO: Love turned sour

Novo Nordisk A/S (NVO) is a pharmaceutical company specializing in diabetes and treatments for haemophilia, growth hormone deficiency and really difficult menopause symptoms.

More simply, this Danish global company, headquartered in the Copenhagen suburb of Bagsværd,   specializes in blood.

Novo Nordisk had the most bullish chart of 15 stocks added today to the Zacks top-buy list.

Its price has grown with only shallow interruptions from $94.58 on Oct. 7, 2011 up to $144.82 on Feb. 28, an all-time high.

Following its breakout into blue-sky territory, the stock immediately pulled back into the shadows with a five-day correction down to $137.00. It has since come back to within a dollar and quarter of the peak.

On the chart, NVO is a breakout waiting to pop. A persistent break above $144.82 would signal the uptrend is still in place.

Certainly the financials are in place. A return on equity of 46%. (Not a typo, 46%!) Long-term debt amount to 2% of equity. (Not a typo, 2%!)

From those two facts alone, I've fallen in love with NVO.

But there is a shortage of competing suitors. Institutional ownership is a mere 7% of outstanding shares. Yet, the price is high: It takes $5.76 in stock to control a dollar in shares.

More broadly, my problem with pharmaceuticals is that they are more prone to regulatory decisions than most other sectors. All it takes as an administrative rejection of a drug to send a pharma company down into the cellar.

NVO is big, and diversified. But still, there is regulatory risk.

With average volume of 353,000 shares, the stock is not among the super-liquid. The options selection is limited, with low open interest and wide bid/ask spreads.

That lack of liquidity and options goodness is like a bucket of cold water in the face. Sadly, after seeing what options are in the NVO cupboard, my short-lived love affair with Novo Nordisk has turned sour.

The company will next publish earnings sometime in May. It goes ex-dividend March 22 on an annual payout yielding 1.74%.

Decision for my account: I'm passing reluctantly on NVO. I like the chart a lot, but the lack of a good options inventory is a deal-killer. Another strategy would be to buy the stock to capture the dividend, but the three-figure stock price doesn't allow much granularity, and frankly there are safer ways to harvest dividends under 2%.


Methodology

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.

Disclaimer

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.

DIS: Breakout in the Magic Kingdom?

The Walt Disney Company (DIS) scarcely needs a description. It's about mouse ears, of course. And amusement resorts on both coasts, and in Paris, and Hong Kong, and Tokyo.

ABC is part of Disney (Hello, Dancing With the Stars!). Disney is books, and games, and action figures, and films -- it would take a fairly lengthy post to do justice to Disney's holdings.

Basically, Disney is money and a lot of savvy when it comes to marketable entertainment.

DIS had the most bullish chart of 16 stocks selected at random from 675 large-capitalization companies. M was the runner-up. BIIB and MTB completed the final four.

The analyst consensus is that DIS is a moderate buy, and the chart certainly supports that consensus.

The stock price has been stair-stepping upward since the October 2011 low of $28.19. The most recent leg up began Feb. 3 at $39.43 and peaked at $44.08 on March 13. In the four days thereafter, the stock has traded within a narrow range.

That pause came at a major resistance level that has been tested time and time again by DIS. It's as though the Magic Kingdom has found it's Magic Stopping Point.

The stock drew back after touching $44.34 in February 2011, after touching $43.88 in May 2000, and after touching $42.79 in May 1998.

So the failure to move persistently above the roughly $44 mark is a big deal, and a persistent rise above $44.34 would be equally big.

That's a wordy way of saying that DIS is poised for a breakout of epic proportions, without drawing conclusions about how likely that breakout might be.

Each test of that level has been followed by a fairly sharp pullback. So for me as a trader, it's a question of confidence that I can get out before too much damage as been done. The prudent trader would wait for the breakout to occur, but the prudent trader would then miss some potentially tasty profit.

DIS has return on equity of 13%, which is below growth-stock territory but still quite good. Long-term debt amounts to 39% of equity, a bit high but not too much of a problem for short-term trading.

Institutional ownership, at 65%, is slightly below the top rank. It takes $1.89 in shares to control $1 in sales -- not a huge bid-up but enough to show that someone out there is interested.

With average volume of 8.8 million shares, DIS has a full selection of options with high open interest and narrow bid/ask spreads.

Implied volatility, at 0.1983, stands at historic lows and has been declining, with interruptions, since last October. At that level of volatility, there is a 68.2% chance of prices closing between $41.03 and $46.01 a month from now.

With volatility that low, I would want to go with a long positions, such as buying call options.

As a diagonal spread, the best I can do for DIS is long the July $40 call and short the April $45 call, for a maximum return of 13% and a risk/reward ratio of 7:1. I generally like to keep my risk/reward ratios at 4:1 or below, and I can get better return elsewhere.

Decision for my account: I've bought calls on DIS, with a $40 strike and July expiration. I could have done a long vertical spread to define my potential loss, but I'm willing to rely on my trade-management skills to mitigate a downturn.


Methodology

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.

Disclaimer

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.

COR: Where The Cloud lives

The "core" in CoreSite Realty Corp. (COR) refers to computer cores, the heart of the data flood that powers the world of 2012. CoreSite owns, develops and operates data centers, those hermetically sealed icy cold quietly humming spaces where corporations house the computers that constitute their particular piece of The Cloud.


Based in Denver, Colorado, CoreSite has data centers in metro Los Angeles, San Francisco, Chicago, New York City and Northern Virginia.


What makes CoreSite's story attractive to me is that it is riding the wave of a current global trend.


A brief history: First we stored stuff on shelves and in the closet, and visited our friends to share it. Then we stored stuff on floppy disks that could be carried from machine to machine. Then we stored on local hard drives and moved stuff over a local area network. With The Cloud, we've cut out the local storage and keep our stuff Out There someplace, always accessible yet ever remote.


That someplace is The Cloud, an increasingly pervasive presence in all of our lives. Does The Cloud "signal the death of materialism, of possessing, of collecting?", asks USA Today?


CoreSite provides the home where The Cloud resides.


COR had the most bullish chart of nine stocks added over the weekend to the Zacks top-buy list.


The chart shows a near-steady rise from $12.34 on Oct. 4, 2011 top today's high of $24. That's also an all-time high, making COR a blue-sky stock, with no resistance to the upside.


So what's the downside?


Well, return on equity is a negative 2%. This company is reporting losses more often than not. And long-term debt amounts to 52% of equity. That's a heavy load to carry when you're not making money.


Also, there's liquidity. The stock has average volume of only 182,000 shares, insufficient to support a wide selection of options with high open interest. The bid/ask spreads are quite wide.


Yet, institutions love this company. They own 95% of the stock. They've bid up the price to the point where takes $2.74 in stock to control a dollar in sales.


And of course, Zacks' compilation of analyst sentiment shows great expectations for COR.


Back in the tech-boom days of the late 1990s, there was a company called PSInet that was riding the wave of a current global trend, in that case providing the infrastructure for retail Internet access -- read "fiber-optic cables".


It was a big deal. The company's name was on the Baltimore professional football stadium.


Of course, the company had never really made a profit, but hey: It was riding a wave. Profits would come later.


I speculated heavily on PSInet, and did well for awhile, until there were reports of a glut of fiber optics in the marketplace. As so many companies do, PSInet had overreached beyond what the market for its product could absorb.


The stock plummeted and was delisted. The company declared bankruptcy, and by 2002 was out of business. And a portion of my funds rode PSInet all the way to the bottom. I learned a good lesson from that trade.


It strikes me that the PSInet saga is a cautionary tale for all who would trade in new-tech infrastructure companies. What CoreSite provides is a commodity. Everyone who's interested knows how to set up a data center. There are few barriers to entry.


And The Cloud is trendy. It's a wave. A lot of people are enamored of the story and want to get in on the action. It's a recipe for over supply, in my book.


CoreSite may well avoid the fate of PSInet. But maybe not.


So, enough of sad remembrances of times past. 


Given the sorry state of the options inventory, COR is a shares play. That means I lack the ability to gain the leverage that options bring and to insure an existing position against downturns.


Decision for my account: Man, I don't trade bullish in companies that don't make money. And I prefer trades that have leverage. And I really love the ability to insure against downturns. I'm passing on COR -- no, Passing, with a capital P. I may give up some huge profits -- surely the smart analysts and institutions and Zacks know better than I -- but I'll sleep better at night without COR on my books.



Methodology

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.

Disclaimer

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.

The Week Ahead: Real Estate

This is housing week on the econ beat, with reports on real-estate markets every day.


Given the challenges faced by housing, these reports may pour cold water on the warm and fuzzy good news coming from the job markets of late.


Let's begin with the Big Three reports: Housing starts at 8:30 a.m. Eastern on Tuesday, existing home sales at 10 a.m. on Wednesday, and new home sales at 10 a.m. on Friday.


Given the glut of housing inventory held over from the real-estate crash and ensuing recession, I consider existing home sales to be the most interesting of the three. Until that inventory moves, there is little incentive for home building to pick up again. 


Besides, existing homes are by far the bigger share of the market.


Second most interesting is the housing starts report, which tracks the extent to which home builders are starting construction. If housing starts are up, then homebuilders are convinced that the market is ready for new inventory, and they are willing to hire the workers and buy the materials to make it happen.


Finally, new home sales, a smaller slice of the market than existing homes and the end of the process through which the real-estate supply expands. At best, it confirms that homebuilders were right in their past market assessments that led to the homes being built.


I find new home sales to be a fairly uninteresting report, although that opinion isn't universally held.


A less significant but also fascinating report is the housing market index, out Monday at 10 a.m. This tracks real-estate markets in 20 metro areas. Since real estate is the most local of markets -- a boom in metro Washington, D.C. doesn't necessarily translate into a boom in Las Vegas -- this report gives added depth and texture to the national numbers.


And finally, little noted and not long remembered, the Federal Housing Finance Agency's house price index, at 10 a.m. Thursday. The FHFA index's fatal flaw as a general indicator is that it tracks only a portion of the market: Mortgages handled by Fannie Mae and Freddie Mac. That's a huge chunk of the market, to be sure, but it's an incomplete view of the landscape.


Real estate aside, I'm interested in only one other report during the week: Leading indicators, out Thursday at 10 a.m. It is a fairly good predictor of future prospects: If it is rising, then the economy will be growing; if falling, then not.


The Fedsters will be out on the speaking circuit in full force during the week, led by Fed Chairman 
Ben Bernanke, who at 12:45 p.m. Tuesday delivers the first of four lectures at the George Washington University School of Business. (The other lectures are scheduled for March 22, 27 and 29.)


If Bernanke runs true to form, I would expect him to commit theorizing rather than news. But I listen to anything he says on any subject with the deep fascination reserved for those who wield immense power.


Two of the Gang of Three inflation hawks on the Federal Open Market Committee will speak: Dallas Fed President Richard Fisher on Monday at 7:30 a.m. and Minneapolis Fed President Naryana Kocherlakota on Tuesday at 5:30 p.m.


The Gang of Three -- Philadelphia Fed President Charles Plosser is the third -- dissented during the summer of 2011 in votes on expanding the money supply to encourage economic growth.


Fisher in his pre-Fed career had institutional ties to former Secretary of State Henry Kissinger’s strategic advisory firm, the private bank Brown Brothers Harriman Inc., and his own money management firm.



Kocherlakota came to the Fed from academia.



Also speaking, New York Fed Pres. William Dudley on Monday, and Atlanta Fed Pres. Dennis Lockhart at 2:30 p.m. and St. Louis Fed Pres. James Bullard at 9 p.m. on Friday


As head of the New York bank, Dudley is the most powerful of the Fed bank presidents. He sits on the Federal Open Market Committee. Dudley's resume shows institutional ties to Goldman Sachs and the Congressional Budget Office under Presidents Bill Clinton and George W. Bush.



Lockhart, an alternate member of the FOMC, had institutional ties to Citigroup (then called Citicorp/Citibank), Heller Financial and the private equity firm Zephyr Management L.P. before assuming his current position.



Bullard, who doesn’t have a seat on the monetary policy committee this term, rose through the Federal Reserve system.



Kocherlakota and Dudley assumed took office under President Obama; Fisher, Lockhart and Bullard under President George W. Bush.


By my rules, as of Monday I can trade April diagonal, butterfly, calendar and vertical spreads, iron condors and covered calls, and June single options and straddles. Of course, shares are good at any time.

Good trading!

ADS and THO: One more time

Two stocks from February are back in my view: ADS and THO.

Alliance Data Systems Corp. (ADS) runs connection tools for retailers -- private-label credit cards, loyalty cards and non-spam email marketing.

Thor Industries Inc. (THO) makes recreational vehicles. (Although the company name is worthy of an Ayn Rand novel -- how could she have skipped mighty Thor after making so much of shrugging Atlas?)

When I last wrote about Alliance on Feb. 8, I said the chart was "of the Cape Canaveral variety -- it looks like the trail left by a rocket launching from the Kennedy Space Center."

It still does, despite a shallow correction from late February into early March.

My analysis of Thor's chart on Feb. 6 was filled with ambiguity and misgivings, encapsulated in four bullet points.

The ambiguity is still there and can be resolved only by a persistent break-out above the present peak, which has been unsuccessfully challenged four times: $34.07 on Feb. 21, $34.12 on Feb. 21, $34.08 on March 15 and $34.17 today (with a sharp pullback).

ADS had the most bullish chart of 10 stocks added today to the Zacks top-buy list, and THO was the runner-up. Zacks' tracking system is sensitive to changes in analyst opinion. Stocks drop from the top buys list and then reappear with some frequency.

My trading strategy lives heavily in the now. ADS and THO are back on the list with the best charts of the day, so I'm interested in giving them a look.

ADS has not published earnings since my last analysis.

THO published on March 8, producing a new set of financial stats, as follows:

THO's return on equity is 15%, up two percentage points from the prior report, and the company is still free of long-term debt. Institutional ownership stands at 78% -- down two percentage points.

The stock remains cheap: It takes only 62 cents in shares to control a dollar in sales.

ADS next publishes earnings on April 23, and THO, on June 11. THO has yet to announce an ex-dividend date for its next quarterly payout, which comes to 1.81% annualized. A good guess is around March 27.

Decisions for my account: I bought calls on ADS, with a strikes of $120 and expiration in September. I shall defer buying THO until I see a break beyond the resistance noted above.


Methodology

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.

Disclaimer

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.

IILG: Three things I distrust

I must confess to having a profound distrust of any company whose web presence defaults to the Investor Relations page.

A company does best, in my Buffetesque view, by tending to its core business and thereby creating value for customers. A company that puts investor relations front and center isn't focusing on its business, but rather on its financiers.

Interval Leisure Group (IILG) provides resort time-share and membership-swap services to 2 million families. The Miami, Florida company operates globally, with offices 15 countries and ties to resorts in 75 countries. Yet its home page (www.iilg.com) focuses, potentially, on me: The trader in search of a few shares and some profit.

That's a disconcerting disconnect in my book.

IILG had the most bullish chart among 10 stocks added today to the Zacks top-buys list.

Earnings released March 9 beat the consensus by 60%, sending prices soaring from $13.46 at the open to a high of $16.71 today, a rise of 24% in five days.

The stock has been in a sideways trend since March 2010, and the current push has yet to break above that range, which has a high of $17.94 set Feb. 17. The prudent trader will wait for a persistent break above that high before entering IILG.

The upward leap appears to be driven almost entirely by analyst opinion. IILG is a low volume stock -- most days it trades below 200,000 shares -- that is followed by analysts who can be numbered on one hand. Those circumstances give great latitude to the quirks of individual analysis, and that lessens my trust in the consensus view.

IILG has high return on equity of 17.5%, but with a heavy load of long-term debt amounting to 137% of equity.

Institutional ownership is high for such a lightly traded stock, although unremarkable for its bigger brothers. Institutions own two-thirds of the shares and have bid up the price so that it takes $2.15 in shares to control a dollar in sales.

IILG next publishes earnings on May 7. The company pays a quarterly dividend yielding 2.39% annualized. The next ex-dividend date is March 29.

That relatively high dividend goes hand-in-hand with the investor relations homepage. I'm not a value trader like Warren Buffett, but ever since encountering his methods, I've had a distrust of debt-ridden companies who pay dividends. Shouldn't they be retaining that value to pay off their loans and grow the company?

The options selection is poor, open interest is nearly non-existent and bid/ask spreads are ridiculous.

Decision for my account: In my discussion above I identified three areas of distrust: The way IILG handles its web presence, the sparse analyst coverage, and its dividend amid debt. I also point to the terrible options board. I'll pass on IILG for my own account. There's too much not to like.



Methodology

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.

Disclaimer

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.

CELG: Trying for a breakout

Celgene Corp. (CELG) is Big Pharma, with a collection of drugs focusing on treatment of cancer and immune system inflammation diseases, such as Revlimid and Thalidomide for multiple myeloma.

The Summit, New Jersey company also gets large revenue from sales of the attention deficit disorder drug Ritalin through a licensing agreement with Novartis.

CELG had the second-most-bullish chart among 18 stocks added today to the Zacks top buys list. It also had the highest volume in the bracket. MAIN had the most bullish chart. HTH and PEI completed the final four.

The CELG chart shows a sharp rise from $61.25 on Nov. 25, 2011 to a high of $75.11 on Jan. 17. Since that date CELG has been struggling to achieve a breakout, setting two higher highs -- $76.09 on Feb. 15 and $77.43 today, but each time on the same day pulling back to within a sideways range that has held sway since January.

Big picture: The breakout level is around the pre-recession peak of $77.39 set in August 2008. That is also an all-time high. So a persistent break above that level will be a meaningful symptom of momentum.

CELG has return on equity of 23% -- growth stock territory -- but with debt amounting to 33% of equity, which is far too high for my taste. (I start to get uncomfortable when long-term debt moves above 10% of equity.)

Institutions are heavily into CELG, owning 892% of shares. And they've bid up the price to a point where it takes $6.90 to shares to control a dollar in sales.

With average volume of 2.4 million shares, CELG has a good selection of options with high open interest and low bid/ask spreads. Earnings will be announced on April 30.

Decision for my account: I bought call options on CELG with a $72.50 strike price.


Methodology

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.

Disclaimer

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.

MAIN: Investment locavore

Main Street Capital Corp. (MAIN) is a Houston, Texas based investment company that specializes in providing funds to support management buyouts, recapitalization and acquisitions.

The companies in its portfolio are far from being household names. Main Street Capital is the investment equivalent of a locavore, since many of its holdings are in the Houston area.

For me, the big caveat that begins flashing in my jet-lagged brain is that with Main Street Capital, I have no idea what businesses my shares represent except when the company makes its quarterly reports.

When I buy Main Street Capital shares, I'm buying the smarts and cunning of the company's decision makers and its 18 employees.

It's a very personal sort of investment, and the caveat is: I don't know these guys and how good they really are.

MAIN had the most bullish chart of 18 stocks added today to the Zacks top buys list. CELG was the runner up and also had the highest volume on the list. HTH and PEI completed the final four.

The MAIN chart shows almost unrelenting rise from the Nov. 21, 2011 opening at $17.29 up to Tuesday's high of $25.49, and indeed since the recession low of $8.34 in November 2008.

A 47% capital gain over a quarter is always welcome, but MAIN's main attraction is a 6.67% annualized dividend, paid monthly. The stock next goes ex-dividend on March 19.

MAIN's managers know how to turn a profit, with a return on equity of 19%. Long-term debt amounts to  76% of equity, a high level but one that goes with the territory for an investment house.

The price has been bid up to where it takes $10.27 in shares to control a dollar in sales, a high level, without strong support from institutional investors, who own only 21% of shares.

The company does have a small selection of options, with low open interest and high bid/ask spreads. but the attractive dividend and monthly payout make the options irrelevant. MAIN is a shares play pure and simple.

The volume is quite low -- 219,000 on average -- which could present liquidity problems. Even so, the bid/ask spread on shares is only two cents.

Decision for my account: I've bought shares of MAIN. It was a remarkably quick fill for such low volume.



Methodology

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.

Disclaimer

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.

The Week Ahead: Fed and Prices

(I shall be back from my travels in Asia on Wednesday and, within the confines of massive jet lag, my posting schedule will return to normal.)


The week will be dominated by the Federal Open Market Committee and the latest inflation (deflation?) numbers, an appropriate pairing in the arena of High Economics.

The FOMC meets on Tuesday and announces results at 2:15 p.m. Eastern. As the economic recovery proceeds apace, the question becomes, when will the Fed ease off on easing and indeed, begin to tighten. A Paul Krugman would keep the stimulus rolling. Conservatives will say, with a degree of hysteria, OMG! Tighten now, before inflationary doom strikes!

On Wednesday at 9 a.m., Fed Chairman Bernanke addresses an independent bankers' conference. Whether he will commit news or not remains to be seen, but I always follow Bernanke's remarks with intense interest.

And then, it is on to the price numbers: The producer price index on Thursday at 8:30 a.m., and the consumer price index on Friday, same time. The Fed has set an annual consumer inflation target of 2%, or about 0.16% a month, not counting compounding.

Other events of note:

Monday: Treasury budget, 2 p.m.

Tuesday: Retail sales, 8:30 a.m.

Wednesday, Import and export prices at 8:30 a.m., and petroleum inventories at 10:30 a.m.

Thursday: Jobless claims at 8:30 a.m., the Philadelphia Fed Survey at 10 a.m. and natural gas at 10:30 a.m.

The Philly Fed survey looks at manufacturing in the mid-Atlantic region but stands as a good indicator of manufacturing nationally. It is an indicator of how the recovery is coming along.

Friday: Industrial production at 9:15 a.m. and consumer sentiment at 9:55 a.m.

By my rules, as of Monday I can trade April diagonal, butterfly, calendar and vertical spreads, iron condors and covered calls, and June single options and straddles. Of course, shares are good at any time.


Good trading!