Tuesday, May 1, 2012

DDD: Unrealized depths

3-D Systems Corp. (DDD) is a company with unrealized depths. Literally. Our technologies are rushing toward a future where one-off custom objects can be made cheaply by printing layers of material, much like an ink-jet printer works.

We're not there yet -- that's the "unrealized" part -- but this Rock Hill, South Carolina company is on the cutting edge of techne that will get us there.

Even today, 3-D Systems tools are used for prototyping objects before they reach the factory floor. Changing the prototype can be a matter a day or two rather than weeks, speeding the design process and by shortening the time penalty, allowing changes to make for better products.

The Economist last week had a special issue on the subject, what they call the Third Industrial Revolution. (It is inaccessible without a subscription, but the magazine is available in most public libraries, and it is well worth the trouble to track it down.)

DDD had the most bullish chart among 39 stocks added today to the Zacks top-buy list.

One problem with trading new tech is that it is rarely a smooth rise to future greatness. Just check out the charts of solar energy companies if you want an example.

The same is true with DDD. The stock is coming off of a major correction that brought the price from $29.35 in April 2011 down to $12.78 in October 2011.

The new uptrend -- the most recent leg up -- began Jan. 3 from $14.85 and has carried the price, with one lengthy pause, up to today's high of $31.56. The rise was punctuated last week by a 92% upside earnings surprise.

3-D Systems has return on equity of 20% but with a high level of long-term debt amounting to 53% of equity.

Institutions own 66% of shares and have bid up the price to a very high level, where takes $5.76 in shares to control a dollar in sales.

It is at this point that the more persnickety sort of fundamentals analyst will say, "Obviously, the stock is overpriced." And so it is, unless sales and the price continue to rise -- then it was underpriced. I just point out his fact to illustrate why I am not a fundamentals trader. I look at the financials, but what I trade is momentum, a quality DDD has in abundance.

DDD on average trades 965,000 shares a day. This supports a modestly adequately selection of options, with high open interest and fairly narrow bid/ask spreads.

Implied volatility stands at 56%, a bit below the midway point of the last six months. It has been moving sideways since April 27 following an extremely sharp decline.

Options traders are pricing in a 68.2% chance that the stock will close between $25.85 and $35.91 a month from now, for a maximum gain or loss of 16.3%.

The company next publishes earnings on July 24.

Decision for my account: I've bought August call options on DDD, the $30 strike. I also see it as a reasonable play for shares or verticle spreads.

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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