Thursday, April 5, 2012

PIR: Conversation pieces

Pier 1 Imports Inc. (PIR) sells imported furniture and other home furnishings. It's the kind of store where the products all have an element of the outré, where you're certain that visitors will ask, "Where in the world did you find that?".

What Pier 1 sells isn't just furniture and accessories. They're conversation pieces.

The Fort Worth, Texas company operates more than a thousand stores, most in the United States but also in Canada, Mexico and El Salvador.

PIR had the most bullish chart of 17 stocks added today to the Zacks top-buy list.

The price has been in uptrend, with minor pauses and pullbacks, since bottoming a a dime in the depths of the recent recession. The long rise has brought to price to Tuesday's high of $19.09, and the trend faltered not at all during this week's broad correction.

The price is a approaching a resistance level, a correction high of around $20 set in 2004 on the stock's long decline. The all-time high of $26.44 was recorded in November, 2003.

Traders who believe in the influence of resistance levels established long ago will want to see a breakout above $20 before entering. Those who are more comfortable embracing risk will jump in down to capture that final 5% or so between the present level and resistance.

Pier 1 has a 30% return on equity, which is way high, and a very low level of long-term debt, amounting to only 3% of equity.

Annual earnings have accelerated in the peak quarters since 2010. Like most retailers, the bulk of Pier 1's business occurs in the 4th quarter, the busy holiday season.

Institutions own 86% of shares, yet the price remains quite reasonable. It takes only $1.35 in shares to control a dollar in sales.

The stock is liquid, with average volume of 1.8 million shares. The options inventory is quite good for a stock trading at that level of liquidity, but open interest is high only in the calls expiring in June.  May and September are seriously lacking.

The narrow distribution of open interest seriously impacts the strategies available to options traders. By my rules at this point long options positions must expire in July or later, which for PIR means September. But open interest around the at-the-money level ranges from one digit to the low three digits on the calls, and from zero to two digits on the puts.

 Bid/ask spreads are also a bit wider than I like.

Of course, the price, being under $20, gives lots of granularity in a shares trade. But even so, the whole situation makes it hard to construct a position to my liking. Opening a shares position is cheap, although it lacks leverage, but ensuring the position through out-of-the-money puts would be relatively expensive.

Implied volatility stands at historic lows, at 43%, giving a 68.2% chance that prices will close between $16.41 and $21.07 a month from now.

Note that "historic lows" for PIR are wildly high levels for most other equities and exchange-traded funds.

Pier 1 next publishes earnings sometime in July. Earnings published before the open today hit analysts' consensus forecast almost precisely.

Decision for my account: PIR has a wonderful chart and excellent financials. If I were willing to put my money in shares at this point, I would open a bull position in a flash. But I can profit more from options positions, and the low open interest on PIR options makes that sort of trade impossible to construct. I'm on passing PIR.

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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