Tuesday, May 22, 2012

SBH: Beauty and the Beast.

Sally Beauty Holdings Inc. (SBH) distributes professional beauty supplies through a chain of more than 4,128 stores in the U.S., Latin America and Europe, 181 franchised stores and 1,116 sales consultants.

Some of the Denton, Texas company's brands are Sally Beauty Supply, CosmoProf and  Sally Hair & Beauty.

SBH had the most bullish chart among 16 higher-volume stocks out of 66 added over the weekend and today to the Zacks top-buy list.

The recent downturn has hammered Sally far less than many other equities.

SBH began its most recent leg up on Feb. 2 from $20.93 and hit a swing high of $27.74 on May 3. From that point it corrected downward to $25.42 on May 18, and has risen the past two days back to above $26.50.

The stock has been trading mainly in blue-sky territory, with no resistance overhead, from the beginning of 2010.

The recent correction was a zig-zag, with an interim lower high of $27.19. A cautious trader would wait for a breakout above that level before entering. An even more cautious approach would be to await a breakout above the all-time high of $27.74.

The upside momentum of the last two days is a compelling counter-argument against waiting to enter, but it is, on the chart, the more risky approach.

So much for the beauty. Now for the beast.

Sally has negative equity, and so no return on equity. Liabilities stands 13% above assets.

For anyone who trades mainly on the basis of a company's financials, this is a deal killer.

Yet, somewhat to my surprise, institutions own 85% of shares, and the stock is trading at a premium. It takes $1.42 in shares to control a dollar in sales.

Earnings were up the most recent quarter, following a three-quarter plateau. The company has surpassed analysts' expectations for the past nine quarters.

SBH on average trades 1.8 million shares a day. The options selection is limited to seven strike prices, with three- and four-figure open interest at-the-money. The bid/ask spread is a bit wider than I like but not catastrophic for a stock at this level of liquidity.

Implied volatility stands at 37%, at the lower end of the six-month range. It has been falling since mid-April.

Traders are pricing in a 68.2% chance that the stock will close between $23.70 and $29.30 a month from now, for a maximum gain or loss of 11%.

Sally next publishes earnings on Aug. 1.

Decision for my account: I'm passing on SBH at this point because the liquidity is below what I like, the  financials are truly ugly and the price, very near term, is in a downtrend. That makes me cautious. A break above the recent swing high of $27.74 would persuade to revisit the decision.

I screened the stocks using a tourney bracket with a six-month daily chart and a five-year weekly chart. 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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