Thursday, May 10, 2012

SHW: A free-rise stock

Sherman Williams Co. (SHW) makes paint and other coatings and sells them through its own chain of stores as well as stores owned by other companies. Altogether, the Cleveland, Ohio company had 3,390 stores in North America and the Caribbean a the end of 2010.

SHW had the most bullish chart of 34 stocks added today to the Zacks top-buy list. The S&P 500 remains in a near-term downtrend -- it will take a rise above 1415.52 to begin reestablishing the uptrend -- but the air-pocket decline caused by Europe's inability to manage its monetary system has paused, and the broad U.S. market is seeing more price rises. Out of the 34 stocks, only three at this writing (2:15 p.m. Eastern) are showing declines of more than 1%.

I've often heard the term "free-fall" applied to a stock. SHW is an example of free-rise.

The most recent leg up began Dec. 16, 2011 at $84.65, and the price has risen on the daily chart with no correction lasting more more than a week. The price hit its first all-time high in that month and has been flying through blue-sky territory ever since.

I've had traders lament that getting into an uptrend late is dangerous, because most of the rise is past. I prefer to follow the wisdom of Yogi Berra, "The game isn't over till it's over." I'll play an uprend as long as it is in force, no matter how long it has been in place. What the trend falters, then I'll exit.

Sherman Williams has return on equity of 34%, with long-term debt of 88% of equity, higher than I like in a growth stock. But money is cheap these days, and will remain cheap until the Federal Reserve reverses course, so perhaps debt isn't a deal killer.

Institutional ownership is low for a major sector player. It amounts 68% of shares, and I would expect something in the 80% range. It takes $1.42 in shares to control a dollar in sales, a premium but not an outrageously high one.

Earnings are seasonal, peaking in the 2nd and 3rd quarter -- spring and summer, when people paint their houses. Those quarters were down slightly in 2011 from the prior year, and up very slightly in 2010.

The stocks gtrades 1.2 million shares a day on average, enough to support a good options selection with three- and four-figure open interest and narrow bid/ask spreads.

Implied volatility stands at 26%, in the lower half of the six-month range. It began rising steeply on Wednesday.

Traders are pricing in a 68.2% chance that SHW will close between $114.83 and $133.11 a month from now, for a maximum gain or loss of 7%.

The company net publishes earnings on July 23. The stock goes ex-dividend on May 16 for a quarterly payout of 1.26% annualized.

Decision for my account: I've opened a short bullish vertical spread (bull put spread) on SHW, using options that expire in June. I'm short the 120 put and long the 115 put.

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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