Monday, April 16, 2012

TITN: Farm equipment

Titan Machinery Inc. (TITN) sells farm equipment through 96 stores in the upper Midwest and Rocky Mountain region. If you're in the market for a tractor, this West Fargo, North Dakota company  is ready to step up and close the deal.

TITN had the most bullish chart among 15 stocks added to the Zacks top-buy list over the weekend. Actually, that's a bit of a mis-statement. It had the only bullish chart among the 15, which either says something about Zacks' selection methods or the state of the market.

It's hard for me to craft a backstory about Titan Machinery without using the phrase "I imagine". The agriculture sector isn't one of my strengths.

But I imagine that a lot of farming enterprises put off buying new equipment during the depths of the recession, and with the recovery taking hold, I imagine they are now starting to make those capital purchases in a context of pent-up demand.

It is the same paradigm that caused durable goods orders to rebound in February.

Certainly Titan's earnings show a pattern of decline and recovery, falling through the middle quarters of 2011 and then recovering thereafter in a series of higher earnings reports.

TITN  began its most recent leg u[p on March 8 at $23.96 and has risen with only one minor correction to Friday's high of $36.92, helped by a 15.5% opening gap following an April 11 report that showed a 59% earnings surprise.

A three-day rise added 16.4% to the gap, meaning the stock has risen nearly 32%  in less than a week.

Return on equity is 16%, but the company has achieved that at the price of heavy long-term debt, amounting to 183% of equity.

Institutions own 76% of shares, but the price is dirt cheap. It takes only 45 cents in shares to control a dollar in sales.

Average volume is 1.2 million shares. The options selection is a bit limited, even at that level, with only nine strike prices available for May, and most of those are priced at $5 increments, which is wide for a $35 stock.

Bid/ask spreads aren't cripplingly wide, although they are a bit wider than I like, and open interest is minimally acceptable near the at-the-money mark.

Implied volatility has recovered sharply from its six month lows below 45% and today stands at 51%. Options are pricing in a 68.2% chance that TITN will close between $29.91 and $40.19 a month from now, a 14.7% gain or loss.

More succinctly: This is a very volatile stock, with all the opportunities for profit and risks of pain that volatility brings.

Titan Machinery next publishes earnings on June 11.

Decision for my account: I'm passing on TITN at this point. The rapid rise of the past few days suggest to me that there will be a period of profit-taking and correction. 
Also, although the options inventory isn't horrible, it's not great, either. The wide strike intervals would make it difficult to construct a vertical spread to my liking. 

However, I think the stock is worth revisiting a week down the line to see what the price has done. A correction and reversal, or a fresh breakout above $37.92 would make a position more attractive, even with the options difficulties.

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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