Wednesday, May 2, 2012

SPG: Many malls

Simon Property Group (SPG) is a real estate investment trust that mainly owns shopping malls -- 151 of them in the United States alone plus hundreds more in Europe and Asia. If you've ever shopped in the King of Prussia Mall in Pennsylvania, the Del Amo Fashion Center in Torrance, California or the Houston Galleria in Texas, you've shopped in a Simon property.

If, as the argument goes, the economy is recovering and someday soon Americans will return to shopping, the Indianapolis, Indiana company will be poised to profit through higher rents and lower vacancy rates. If job growth fails to continue, then its earnings will falter.

Retail, truly, is not a complex sector.

SPG had the most bullish chart among 26 stocks added today to the Zacks top-buy list.

The price has been in an uptrend since 2009. Even the correction lows during that long period have been higher than the prior lows.

The most recent leg up began Nov. 25, 2011 from $115.63 and hit an all-time high of $158.60 on Monday. The stock has been trading entirely in blue-sky territory since January. The last four days of the uptrend followed an earnings announcement that  beat the Street by 8.5%.

Simon Property Group has the numbers to support such an extended rise. Return on equity is 28%, although long-term debt is huge, amounting to 375% of equity.

That debt level, clearly, doesn't bother institutions, who own 95% of shares and who have bid up the price so that it takes $10.84 in shares to control a dollar in sales. That's nearly triple Apple's price relative to sales.

Earnings are not especially cyclical -- a benefit of getting your money from rents rather than sales. Earnings have accelerated sharply in each of the past four quarters.

SPG on average trades 1.4 million shares a day, enough to support a good selection of optoins with narrow bid/ask spreads and high open interest.

Implied volatility stands at 21%, at the low end of the six-month range. It rose slightly beginning April 30 but faltered today.

Options traders are pricing in a 68.2% chance that the stock will close between $147.75 and $166.73 a month from now, for a maximum gain or loss of 6%.

Simon Property Group next publishes earnings on July 23. The stock goes ex-dividend on May 15 for a quarterly payout  yielding 2.54% annualized.

Decision for my account: I like SPG's chart and can tolerate the financials. The high debt relative to equity and price relative to sales are a bit troubling. However, I don't have room for it now in my portfolio. I'm wanting to preserve my free cash until I can see what opportunities open up after my May diagonal positions expire.

Another reason for my lack of enthusiasm: The volatility implies only a 6% gain (or loss) over the next month. As a trader, I want a likelihood of bigger moves. Trading stocks is risky, and I'm looking for rewards commensurate with that risk. After all, volatility is the mother of profit, and SPG looks a bit like Mom is absent.

I would play SPG as long calls expiring in November or a long vertical spread (bull call spread) expiring in June. If I were interested in the dividend I would go for shares, but 2.54% isn't enough to entice me into giving up the leverage that options provide.

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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