Tuesday, March 27, 2012

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.

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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