Wednesday, April 18, 2012

EMC: Information plumbers (updated)

Update: EMC missed analysts' estimates when it announced earnings this morning, and the stock slid by nearly 5%. In my decision yesterday, I said I would wait for earnings before opening any EMC position. That proved to be the right choice. In light of the earnings announcement, I won't be trading EMC at this point. Here's the Bloomberg story.

EMC Corp. (EMC) designs the electronic plumbing of the Information Age, developing, installing and supporting the infrastructure that lets companies store and move their data. EMC will announce earnings before the opening on Thursday.

Many companies have put off IT expansion plans during the recession. The recession is over and the recovery is limping forward. In my book, this is a time when "plumbers" like EMC can expect growing business as their customers catch up with un-met needs.

The Hopkinton, Massachusetts Fortune 500 company is ranked, by Fortune, as the third most admired computer company in the world.

EMC ranked among the four most bullish charts of 20 stocks added today to the Zacks top-buy list.

None of the charts was unambiguously bullish, and I've written about two of them, CBS and DDS, previously this year. I've selected EMC out of the top tier because it has bounced up from a correction in the last week and also has room to the upside for a major move if it successfully breaks above $30.

EMC began its present uptrend on Dec. 29, 2011 at $21.49, peaking at $30 on March 28. A correction four trading days after the peak brought the price down to $27.93 on April 11. Since then, the price has risen to a post-correction high of $29.40 on Tuesday.

What's interesting is the history above $30. EMC has already broken above resistance set as it recovered from the stock's depth of under $6 per share after the tech bubble burst. A rise above $30 leaves little in the way of resistance all the way up to the tech bubble peak of $104.94 set in September 2000.

So, a fresh breakout and room to exercise its ambitions.

There is, of course, also room to question whether 12-year-old resistance means anything. If it doesn't, then that's even more bullish for EMC, since it anything above $30 can be treated as blue-sky territory.

EMC has return on equity of 14%, which puts it below my growth-stock standards. Long-term debt, however, is quite low, amounting to only 10% of equity. So the lower return is palatable.

Institutions own 80% of shares and have driven the price up so that it takes $3.04 in shares to control a dollar in sales.

EMC's earnings show a seasonal pattern, peaking in the 4th quarter. That quarter's earnings have been on a steady rise for two years.

The stock is highly liquid, with average volume of 18.4 million shares. The is reflected in the options inventory, which has narrow bid/ask spreads and heavy open interest.

Implied volatility stands at 29%, around the mid-range for the past three months. It has been declining sharply from Tuesday.

Options are pricing in a 68.2% chance that EMC will close between $26.59 and $31.45 a month from now.

EMC next publishes earnings before the open on Thursday. Given that, it is hard to say whether to assume a greater decline in the volatility, suggesting a short, net credit position, or a reversal, implying a long, net debit position.

Decision for my account: I plan to open a bull position of some sort, but not until after earnings are announced tomorrow morning. And that decision, of course, is tentative, depending upon what the earnings are and how the market responds. Overall, though, there is nothing at this point that I dislike about EMC as a trade.

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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