Monday, June 18, 2012

AFAM: Home health care

Almost Family Inc. (AFAM) provides home health services in 11 states spotted across the South, Midwest, Northeast and Mid-Atlantic regions. It's nurses visit the ill and infirm at home, providing personal care, helping them manage their meds and preparing meals.

The Louisville, Kentucky company is on the cutting edge of the nation's rising population of elders. We are in the midst of a old folks bubble that will eventually dwarf the real-estate bubble of the 2000s that eventually helped bring down the global economy.

I selected AFAM from a list of 30 stocks added to the Zacks top-buy list over the weekend. Although the list is for subscribers only, Zacks typically makes a handful of its picks available to non-subscribers, and AFAM was among their number.

I haven't read the Zacks report yet so that my analysis will be independent. You can read it here.

I chose AFAM based on the chart, but with a difference from past practice. I've changed my screening technique, focusing less on current momentum and more on pricing relative to the recent past.

In doing so, I'm hoping to avoid the absurdity of trying to hop aboard the train at Penn Station when it's already halfway to Chicago. I'm looking to buy low, on the theory that if the analysts' are right, then I'll be able to sell high down the road.

I'll be looking at where the trades have occurred in the last five market days with an eye to finding entry points below the bulk of those trades, which I postulate occur in a range that both buyers and sellers see as being fair. Out side of that fair price range, either buying or selling will dry up.

Being a quant at heart, I use statistical methods to determine my fairness zone: It is the range that contains one standard deviation from the price that has the most trades. That range will contain 68.2% of trades.

AFAM hit the top of its five-day range, $21.49, on June 14, before dropping sharply to a low of $20.39 around noon Eastern today. It has since reversed, setting higher high and lows in the last three half hours. It remains below the five-day fair price range, suggesting that it is underpriced.

So far AFAM is trading within the fair price range, suggesting that it is priced to attract both buyers and sellers.

On the daily chart, the price has been in a sideways range for six trading days, with the range peak coming in at $21.49. The next higher reversal peak is at $22.49 on June 7. Both are resistance levels.

This is all occurring within an downtrend that began last April from $25.83.

Almost Family has return on equity of 10%, which is in the slow-and-steady range, but with very little long-term debt, amounting to only 10% of equity. That low debt gives it the financial clout to meet emergencies and exploit opportunities.

Institutions own 62% of shares, on the low side, and the price is cheap -- it takes only 57 cents in shares to control a dollar in sales.

Earnings fell through most of 2011, recovering a bit in the 4th quarter only to decline again the 1st quarter of this year.

Four of the last six quarters have shown upside earnings surprises, and two have surprised to the downside. The quarters have all shown a profit.

AFAM on average trades 44,000 shares a day, insufficient to support a wide selection of options or high open interest. Bid/ask spreads are on the wide side, although narrower than I would expect. I would not trade options on this stock because the liquidity is so poor. Shares only.

Implied volatility stands at 65%, in the upper half of the six-month range.

Options traders are pricing in confidence that 68% of trades will fall between $16.77 and $24.53 over the next month.

Over the last month, 68% of trades have been between $20.57 and $21.72, and for the last five days, between $20.76 and $21.33.

Almost Family next publishes earnings on Aug. 2.

Decision for my account: I like AFAM as a trade and if it had a better options liquidity, then I would jump it. However, the absence of the leverage that options provide means that I have better opportunities that I can pursue. So I won't be playing AFAM.

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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