Wednesday, April 25, 2012

EXR: A space REIT

Extra Space Storage Inc. (EXR) is a real-estate investment trust (REIT) that owns and operates storage facilities.

One characteristic of the housing collapse of the last decade was an increase in the number of renters who, nearly always, are short on storage space. Extra Space has been well positioned to provide that extra space renters need.

EXR has the most bullish chart of 18 stocks added today to the Zacks top-buy list.

I last wrote about EXR in a January analysis, and the chart hasn't changed much since then. It's still going out like gang-busters.

At that time, I wrote: "EXR is a blue-sky stock. Last March it exceeded its pre-recession high of $20.55, set in 2007 and has stayed above that level since last October." That holds true today.

I bought shares of EXR in January and sold them in early February, for a 4.5% profit, as the price went into a sideways correction lasting until mid-March.

After that correction, the most recent legs up began March 12 at $26.40, rose to $29.20 on April 2, corrected down to $27.45 on April 10, and then pushed up to today's high (so far) of $30.13.

Note, however, that although the stock has traded today entirely above yesterday's high, it has declined intra-day, showing that the high lacks conviction.

In my January write-up I sounded a cautious note about declining volume. That has changed, with volume rising from mid-March into April, but declining in the last few days.

Extra Space Storage has a mediocre return on equity of 5% with high long-term debt totaling 134% of equity.

Institutions own 87% of shares and have bid the price up to where it takes $9.54 in shares to control a dollar in stocks. That's one of the highest premiums I've seen.

Earnings have risen every quarter but two since the 3rd quarter of 2009.

EXR on average trades 1.8 million shares a day. It has extremely wide bid/ask spreads and very low open interest on a pathetic selection of strike prices. That's why I bought shares last time I traded EXR, and that restriction holds true today.

Implied volatility stands at 35%. Dozes at 35% would be more accurate, as it has pretty much flatlined at a six-month low since April 12.

And that makes the wide bid/ask spreads on options extremely weird. Generally, spreads widen to accomodate uncertainty which manifests itself through high implied volatility.

Compared to the exchange-traded funds tracking major indexes, 35% is high. But histroicall for EXR, it is rock bottom.

I don't see a market-based reason for such wide spreads.

Options traders are pricing in a 68.2% chance the stock will close between $26.79 and $32.89 a month from now, for a 10.2% gain or loss.

Extra Space Storage next publishes earnings on April 30. The stock goes ex-dividend in June for a quarterly payment yielding 2.68% annualized.

Decision for my account: I won't open a position today because earnings are so near. I would consider a bull position -- stocks, not options -- after earnings, if the chart is still highly bullish. However, in practical terms, I don't have room for shares in my portfolio at this point because I'm heavily invested in diagonal spreads, which pay much better than shares. So I doubt that I'll open a position even if earnings go well.

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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