Friday, April 20, 2012

TSCO: Farm and yard

Tractor Supply Co. (TSCO), despite having a name that creates visions of the hardy American farm family plowing the prairie to feed the world, isserving a portmanteau market.

The Brentwood, Tennessee company really does have supplies that are used by people running real tractors, but it also has stuff needed for the upscale suburban big back yard. Not to mention clothing, pet supplies, and toys for the little kiddos.

So if I'm a serious farmer, will Tractor Supply be my first stop? Or are the company's 1,085 stores in 44 states mainly feeding lifestyle and image aspirations? The first, more specialized market is narrower but likely with greater margins. The second model serves a broader market but one with greater competition that keeps margins lower.

And with such a diffuse range of product types, can it serve both markets well?

Tractor Supply had the most bullish chart among nine stocks added today to the Zacks top-buy list.

TSCO, which has been rising since its recession bottom in 2009, began its most recent leg up on Jan. 6 at $69.31, and has risen steadily up to Thusday's higher high of $101.20.

The stock has been in blue-sky territory -- setting all-time highs -- since September 2010.

The company is a money maker, with return on equity of 23% and no long-term debt. That makes it a growth stock by my definition.

Institutions own 84% of the shares and yet the price doesn't carry an outrageous premium. It takes only $1.68 in shares to control a dollar in sales.

Earnings show a seasonal pattern, peaking each year in the 2nd quarters -- think spring planting. That quarter's sales were up in 2010 and 2011 over the year-ago quarter. The 2012 results won't be out until July, but analysts are forecasting another rise.

On average TSCO trades 1.4 million shares a day. That's enough to give a reasonably good options selection with three- and four-figure open interest.

The bid/ask spreads are a bit wide, amounting to 8.8% on the May strike nearest to current price. Compare that to a 0.5% spread on the comparable strike for SPY, the massive exchange-traded fund that tracks the S&P 500.

Implied volatility is above the six-month lows but has been falling since April 11. Because of the marked decline, I would tend to play TSCO with a net debit position, such as a bull put spread.

Options are pricing in a 68.2% chance that the price will close between $90.77 and $108.47 a month from now, an 8.9% gain or loss.

Tractor Supply next publishes earnings on April 25. The stock goes ex-dividend sometime in June for a quarterly payout yielding 0.48% annualized.

Decision for my account: I won't trade TSCO this close to earnings. More broadly, I'm passing because of the wide bid/ask spread. I prefer narrower spreads so that I need less price movement to overcome the cost of the transaction. Otherwise, I like the chart and love the financials. I would probably open a bull positions, post-earnings, if I were interested in doing a shares trade.


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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