Wednesday, May 16, 2012

MANH: Supply chains

Manhattan Associates Inc. (MANH) designs software systems to manage supply chains and inventory in the broadest sense of the terms -- not just the goods but the people tasked with managing those goods.

The Atlanta, Georgia company's serves a global customer base of more than 1,200 companies. The American supermarket chain Winn-Dixie and the Chinese retailer of children's products Boshiwa are among the most recent customers to adopt the Manhattan Associates system.

MANH had the most bullish chart among 24 stocks added today to the Zacks top-buy list. The selection was pretty poor -- most have low average volumes and downtrending charts. But, as traders, we play the hands we're dealt, or at least analyze those hands to decide whether or not to fold.

Manhattan Associates is a small-cap company, with a market capitalization of $988 million. This puts it outside my normal trading domain -- the large caps and mega caps and super-duper-really-big caps.

Often, small-cap charts will have a chaotic quality, like static on an old analog TV screen. That's not the case with MANH. The trends are very clear.

The stock began a stairstep rise in April 2009. The most recent leg up began April 25 of this year from $47.43, after a 36% upside earnings surprise. The price hit a swing high of $51 on the third trading day, April 27, and has since retraced to has low as $47.42.

Given the rise on the weekly chart, I'm tempted into using a term I never use in my analysis: The MANH pullback looks like a buying opportunity to me. 

Of course, "buying opportunity" implies a forecast that the price will go up again. I have no crystal ball, nor am I a prophet, so it's really a stupid term to use under any circumstances.

The prudent trader will wait for a break above $49.76 -- the highest high since the correction low -- before entering. The really prudent trader will wait for a break above $51.

Manhattan Associates has return on equity of 29% with no long-term debt. That makes it a growth stock by my definition. Institutions own 98% of the shares, and the price has been bid up so that it takes $2.90 in shares to control a dollar in sales.

Earnings in 2011 were about double those in 2010. All quarters since the 2nd quarter of 2009 have seen earnings surprises.

The results are really quite impressive.

On average the company trades 82,000 shares a day. That's not enough to support a wide options selection. Open interest is quite low and the bid/ask spreads are astronomical.

The only way I would trade MANH, then, is through shares.

Implied volatility stands at 53%, in the lower half of the six-month range. It has been declining since April 13.

Options traders are pricing in a 68.2% chance that the stock will close between $41.17 and $56.21 a month from now, for a maximum gain/loss of 15%.

The company will next publish earnings on July 16.

Decision for my account: MANH doesn't meet my liquidity standards so I won't be playing it. If I were to play it, I would buy shares and possibly sell covered call against them. When selling calls, the wide  bid/ask spread works in my favor. However, the liquidity issue remains, and I might not be able to exit a covered call quickly.

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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