Wednesday, May 9, 2012

CNK: Ignoring the trend

Cinemark Holdings Inc. (CNK) operates theaters in the United States and Latin Americda. Altogether, the Plano, Texas company has 456 theatres and 5,152 screens.

CNK is the stock having the highest average volume and an uptrending chart among 47 stocks added to the Zacks top-buy list. 

Of those 47 stocks, 15 are trading more than 1% below the prior day's close as of this writing (1:30 p.m. Eastern). Only 15 are trading above yesterday's close. So rather than wasting time doing a full screening of stocks that I'm not going to even consider buying, I cherry-picked.

In judging the market overall, I'm sitting on the fence. The S&P 500 pushed down to a lower low before retreating to the top of today's range (so far). Near term, the index remains in a downtrend, so I'm reluctant to open any new bull position at this point.

But, there are stocks that have ignored the course of the broader market, and I would be remiss if I didn't take note of them.

Cinemark's immunity (so far) to the recent market downturn may be a result of both its industry and its geographical diversity.

Movies are cheap entertainment in tough times, when other venues may be priced at more than the market will bear. 

Its Latin American holdings, amounting to a quarter of its movie screens, give it a different exposure to Europe than North American companies have. LatAm's ties are to Spain and Portugal, countries that have already undergone some of the worst stages of financial failure.

CNK's most recent leg up began Jan . 6 from $18.11 and reached a highest high of $24.43 on Monday. The stock has been trading in blue-sky territory since April.

While the S&P 500 saw its decline from May 2 accelerate on Monday, CNK hit its high, drew back to within the prior week's range, and then enjoyed to intra-day rises on Tuesday and Wednesday to levels that are above the prior range although still below the all-time high.

On the books, Cinemark is far from being a high flier. Return on equity is a staid 4%, and long-term debt is a disturbing 162% of equity.

Institutional ownership is respectable although not spectacular, amounting to 80% of shares. The price is almost at parity with performance. It takes $1.16 in shares to control a dollar in sales.

Quarterly earnings show no trend -- they tend to be all over the map. The two quarters of 2011 below the consensus. The rest from 2012 onward did better than analysts expected.

CNK on average trades 1.4 million shares a day. That's enough to support a moderate selection of options, with adequate yet highly concentrated open interest and wide bid/ask spreads.

With open interest so concentrated, it would be difficult for me to construct an sufficiently liquid options spread. One leg would have three-figure open interest, and the other would have none.

So, given that pathetic options inventory, the only way I would trade this company on my own account is as shares.

Implied volatility stands at 32%, which is the lower part of a 6-month range that hit bottom in mid-April at 29%. The overall volatility trend has been sideways since May 1.

Traders are pricing in a 68.2 chance that the stock will close between $21.89 and $26.33 a  month from now, for a maximum gain or loss of 9%.

Decision for my account: I won't be trading CNK at this time. I don't want to trade shares and thereby forego the leverage I get from options. Also, my ambiguity about the broader market trend discourages me from opening a new bull position today.

I cherry-picked this stock from the Zacks selection, judged its trend from a six-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context. 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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