Thursday, April 12, 2012

ACAT: Liquid but slushy

Arctic Cat Inc. (ACAT) makes and sells snowmobiles and all-terrain vehicles. The half-century-old Thief River Falls, Minnesota company has dealerships in the United States and Canada.

It is a business that puts Arctic Cat in the want-to-have category of products, not the got-to-have. So it was hammered hard by the recession (the stock dropped to $2.40) as consumers cut back on discretionary and play-time spending. And it has recovered powerfully with the return of optimism and a growing economy.

And if things turn down again, perhaps under pressure of a renewed recession in Europe, then I would expect Arctic Cat to skid downslope dramatically.

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

Its most recent leg up, from $18.99 on Dec. 26, 2011, has carried the price up to an all-time high of $44.76 on April 3. The stock has been trading in blue-sky territory since the first of the year.

On the books, Arctic Cat is a solid company with growth-stock aspirations. The return on equity is 16%, and the company has no long-term debt. Institutions own 80% of the shares but the price remains reasonable, at $1.40 in shares need to control a dollar in sales.

The company's business is seasonal, peaking in the 3rd calendar quarter (the corporate 2nd quarter). And earnings have been accelerating in that quarter since 2009, compared to the prior year.

So far, there is a lot to love about Arctic Cat, but that love starts to chill once I turn to the options list. The selection is sparse, bid/ask spreads are wide and open interest is low. I would be hard pressed to construct a viable options position on this stock, so were I to trade, it would be as shares, with no direct way to insure them through out-of-the-money puts.

Volume averages only 218,000 shares a day -- which is liquid, but slushy.

Implied volatility is high, at 76%. And that's down form the six-month peak of 85% on April 11. It is a case where the volatility really doesn't match the chart. It looks instead like something I would expect to see on a stock that has suddenly plummeted from its peaks. ACAT hasn't plummeted.

Options traders are pricing in a 68.2% chance that the price will close between $32.78 and $51.82 a month from now, a 22.5% gain or loss.

Arctic Cat next publishes earnings on May 14.

Decision for my account: I'm not trading this one because of the poor options inventory. I'm also concerned by the abnormal pattern of implied volatility in relation to the price movement. It may be OK. I just don't understand it. I like the chart and the financials. If this level of liquidity fit into my strategic mix, then I would give further thought to opening a position.

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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