Sunday, April 22, 2012

More Liquid Buys: DFS, LOW, AET, CBS

In a posting on Saturday I set out my discontent with the trading prospects my methods were producing.

In response, I built a pool of 51 stocks rated top buy or buy by analysts, and from those used my bracket method to select those with the most bullish charts.

The Saturday posting listed the champions. Today's posting analyzes the runners-up.

I've found in working with charts that the difference between a champion and a runner up is usually a hair's breadth. Well, sometimes a pencil's breadth. So the four stocks that follow have charts that, in my opinion, qualify as among the best of the better.

Discover Financial Services (DFS) is the Discover card and Diners Club card -- products that stand well below Visa and Mastercard in the hierarchy of easy credit. The Riverwoods, Illinois company also has a direct banking segment and operates a global credit-card payments network, PULSE.

I last wrote about DFS on April 13 (read it here), and nothing has changed since then. the price continues to hold in a sideways pattern, where a move above $33.34 counts as a very near term breakout and above $34.43 as an unambiguous resumption of the bull trend.

I won't repeat the analysis here and shall refer the reader to that earlier posting.

Decision for my account: I own DFS as a diagonal spread and would be willing to open a bull position on the current trend.

Lowe's Companies Inc. (LOW) is a home improvement retailer, selling from 1,745 big-box stores, most in the United States  but with a few in Canada and Mexico.

One statistic I find fascinating: Mooresville, North Carolina company's stores amount to 197 million square feet of retail selling space. That's a lot of stuff just waiting for happy consumer to open their wallets and buy buy buy.

I think the theory behind Lowe's is that buy buy buy they must. Everyone has delayed spending amid the uncertainties of the recession. As growth continues to pick up, the theory goes, homeowners will begin flocking the Lowe's to buy supplies so they can make those much needed repairs and improvements.

LOW's most recent leg up began Jan. 10 at $24.75 and peaked April 16 at $32.29 before beginning a so-far shallow recession that has lasted four days.

The price is approaching its pre-recession peak of $35.74, set in 2007, so there is a lot of historical resistance to further gains, at least if you buy the theory that old price levels constitute effective resistance. From my short-term perspective, I'm unconvinced that they do.

LOW has return on equity of 11% and carries a slightly high load of long-term debt amounting to 46% of equity. If I were looking for growth stocks for the long term I would turn away from those figures.

Institutions own 77% of shares -- also a bit low for a growth stock. The price is discounted. It takes only 76 cents in shares to control a dollar in sales.

Earnings are cyclical, peaking in the 2nd quarter, the spring season when a homeowner's fancy turns to projects. Q2 earnings per share rose in 2010 and 2011 from the year-ago quarter, but not by a lot.

LOW on average trades 10.6 million shares. That high level of liquidity gives it an excellent options selection, high open interest and narrow bid/ask spreads.

Implied volatility stands at 26%, which is near six-month lows. It has been falling since April 16. Options traders are pricing in a 68.2% chance that the stock will close between $29.27 and $34.03 a month from now, a 7.5% gain or loss.

Lowe's next publishes earnings on May 21. The stock goes ex-dividend on Monday, April 23, for a quarterly payout yielding 1.77% annualized.

Decision for my account; I intend to open a bull position on LOW. With implied volatility falling I would tend to play LOW's for a net debit, perhaps as a bull put spread. I would also look at it as a diagonal spread prospects.

Aetna Inc. (AET) is a health- and life-insurance behemoth. The Hartford, Connecticut company is listed in the Fortune 100.

AET's chart screams uncertainty. It has been stairstepping up since its 2009 recession bottom in a series of rapid advances and selling panics.

Like all companies in the health industry, Aetna faces great regulatory uncertainty. They know what their regulatory environment will look like of the Obama-era health reforms stands. But given the Republican party's strong vow to repeal as much of the reforms as possible, that known regulatory ground could melt away in a vote.

The outcome of this year's congressional and presidential elections will do much to resolve the uncertainty.

The most recent advance began March 29 at $46.26 and peaked the next day at $51.14. The price then corrected down to $47.07 (a higher low) on April 16, and has since resumed a sharp rise, up to $49.64 on April 19.

Normally, I would say that prudence dictates waiting for a breakout above $51.14 before entry. But given the explosive nature AET's advances, a trader can only open a position before the next advance and hope it materializes, exiting if the price turns down again.

On the chart, even with the pullbacks, AET has been in an uptrend since 2008.

Aetna has return on equity of 20% -- the low end of my range for growth stocks -- but with a bit too much in long-term debt, amounting to 44% of equity.

Institutions, however, love the company. They own 89% of shares. Yet the price is very cheap. It takes only 51 cents to control a dollar in sales.

The company's earnings are seasonal, but in an inverse sort of way. The 4th quarters earnings are low, and the other three generally form a plateau. The three-quarter plateaus were higher than the prior year in 2010 and 2011.

AET on average trades 2.7 million shares. The options selection is excellent, open interest is adequate and bid/ask spreads are narrow at the money.

Implied volatility stands at 31%, well above the six-month low of 25% set on March 21. Volatility has been falling since April 19.

Options traders are pricing in a 68.2% chance that the stock will close between $44.84 and $53.58 a month from now, an 8.9% gain.

Decision for my account: I conditionally intend to open a bull position on AET. Given the falling volatility, I would structure it as a net credit trade, perhaps a bull put spread. One note of caution: AET closed Friday with a spinning top candlestick, with the price unchanged from the opening bell. That is a hesitation pattern, and could signal a reversal, which would negate any plans I might have to open a bull position immediately.

CBS Corp. (CBS) is a media company. It is CBS TV and radio, of course, but also Showtime, The Movie Channel and the CW network on cable, the publishers Simon & Schuster, Pocket Books and Scribner's, and Westinghouse Electric Corp.

The New York City company got back into the movie production business after an absence, leading off with the 2010 film "Extraordinary Measures".

CBS's chart has completed seven days of recovery from a sharp correction that carried the price from a swing high of $34.17 on April 3 down to $3.25 on April 10. The pre-correctoin leg up had carried the price from $23.35 on Nov. 23, 2011.

The prudent trader will wait for a break above $34.17 before entry. Those of a more speculative bent, like me, might well get in ahead of time and see what develops.

CBS has return on equity of 13% with long-term debt amounting to 60% equity. Institutions own 85% of shares. The price is at a premium. It takes $1.52 in shares to control a dollar in sales.

Earnings were generally on the rise, with a few failures, into 2011. Earnings per share peaked in the 2nd quarter, and then fell a bit. The most recent quarter was high but had not yet equalled the 2nd quarter peak.

CBS trades 7.9 million shares on average, sufficient liquidity to support an good selectoin of options, adequate open interest and narrow bid/ask spreads.

Implied volatility stands at 32%, well above the 23% six-month low set on March 16. Volatility has been in a plateau since the April 10 peak of a rise from that low.

Options traders are pricing in a 68.2% chance that the stock will close between $30.24 and $36.28 a month from now, a gain or loss of 9.2%.

CBS next publishes earnings on May 1. The stock goes ex-dividend in June for a quarterly payout yielding 1.2% annualized.

Decision for my account: I intend to open a bull position on CBS. It's hard to know what to do with the implied volatility being so neutral, and I'll reserve a selection of position structure for when I actually make the purchase.


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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