Tuesday, April 10, 2012

IVZ: Investment management

One thing that has always puzzled me about the Zacks system of ranking is the number of stocks rated top buy that have fairly awful charts. Zacks is a mid-term system. The idea is that the price will rise over the next few months after a rating is issued, and the company has statistics to back that up.

Yet, as a chart-driven trader, opening a bull position on a stock with a falling price has always seemed to me as something akin to bungee jumping with a suspect cord. I may bounce up again after diving off of the  bridge, but I might not.

Since we're in the midst of a day where every stock's chart looks awful, this is an opportunity to look at a Zacks pick that normally wouldn't make the cut.

Invesco Ltd. (IVZ) manages investments globally, 60% of them retail and 37% institutional. The Atlanta, Georgia company manages, among other things, a line of mutual funds.

IVZ is the most liquid of 26 stocks added today to the Zack's top-buy list.

It's chart is certainly not the worst that I've seen, but normally I would reject it out of hand during my chart screen.

IVZ hit a peak of $26.94 on March 27, culminating a rise that began in October 2011 at $15.39. Subsequently, the price faltered and then began a rapid decline in line with the broader market, and so far today has hit a low of $24.58.

Whatever its other virtues as a trade, the price is in a downtrend, and I don't buy downtrends.

The previous correction low in the rise from October was $23.76 on March 6. A decline below that level would by definition set up IVZ for a downtrend, although it would take an upward reversal to a high below $23.76 and then a downward reversal to confirm the trend.

If the Zacks rating is indeed correct, of course, then the present decline sets up a wonderful buying opportunity that would justify opening a position upon a reversal without reference to the prior correction low.

Invesco has return on equity of 9%. This is not a hot-shot growth company by any measure. It's a tortoise, not a hare. Long-term debt is 84% of equity, a high level common to financial companies.

Institutions love IVZ. They own 86% of the shares, and have bid up the price to the point wher eit takes $2.76 in shares to control a dollar in sales.

Earnings have been fairly stable for the past five quarters, other indication that this isn't a rocket ship.

The stock is highly liquid, with average volume of 3.6 million shares.

Options have a reasonable inventory -- 14 strike prices for May -- but the open interest is severely concentrated, and most strikes have none. The bid/ask spreads are quite reasonable.

Implied volatility is above expected lows but has been steady sideways since mid-March. It stands at 28%, giving a 68.2% chance that the price will close between $22.59 and $26.61 a month from now.

Invesco next publishes earnings on April 26. The stock goes ex-dividend in May for a quarterly payout yielding 1.99% annualized.

Decision for my account: Once the price reverses, I would play IVZ as shares, in order to collect the dividend. The open-interest concentration doesn't lend itself to reasonable options plays, except for buying out-of-the-money puts as insurance on a bullish 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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