Thursday, June 7, 2012

CHMT: Mystery rise

Chemtura Corp. (CHMT) makes specialty chemicals for agriculture, building and construction, electrical and electronics, transportation and other business sectors, including the chems used in swimming pools and spas. The Lawrenceville, Georgia company sells globally, including in Europe.

Chemtura was among the stocks added today to the Zacks top-buy list. Zacks makes a few of its picks public each day, visible to non-subscribers, and Chemtura was among them. I haven't read Zacks' report on CHMT yet, to ensure that my analysis is independent of theirs. You can read the Zacks report here.

CHMT has shot upward to $14.57 with two opening gaps and consistent intra-day rises for three days straight after trading began on the NYSE Euronet Paris exchange.

The bump followed a decline, in line with the general markets, from a swing high of $17.91 on May 4 down to a low of $13.17 on June 4. So the stock has gained 10% in three days.

On the way down from the swing high, CHMT did a counter-decline rally that peaked at $15.42, a level that I would consider to be resistance.

As a trend follower, I'm always a bit reluctant to trade on news. Once the cat is out of the bag, as this particular kitty surely is, and once the markets have responded, there's nothing left to motivate a further rise.

Yet CHMT has risen strongly for three days since Paris trading began, so there may be something more going on here. Certainly, a Euro-zone listing in the midst of yet a another round of the huge Euro-debt drama seems counter-intuitive.

If it's an exceptionally strong company, a unique player like an Apple, for example, that could explain it. If it has no exposure in Europe, that could be a reason. If it somehow prospers in tough times, that would also help make sense of the rise.

But, giving away the punchline here, none of those things apply to Chemtura.

The rise has come on lower volume that has declined the past two up days.

On the books, Chemtura looks like a mainstream, well established company, lacking fireworks and glitter but also not falling into an abyss.

Return on equity is 13%, and long-term debt is 75% of equity, a bit higher than I like but not crippling.

Institutions own 92% of shares, yet the price is below parity. It takes but 46 cents in shares to control a dollar in sales.

The company turned profitable at the start of 2011 and has remained profitable since, with upside earnings surprises the last five quarters.

One key characteristic of Chemtura's business is that it's not on the retail front lines. It makes stuff that other companies use in their production. So this will give Chemtura a great ability to play across sectors -- a source of strength -- but will also make it vulnerable to other industries' hard times -- a weakness.

I don't see how it's possible for a company with Chemtura's business model to go contrary to the general flow of business. In general good times I would expect it to be exceptionally good, and in bad times, exceptionally awful.

On average CHMT trades 728,000 shares a day. It supports a moderate selection of option strike prices with reasonably narrow bid/ask spreads. Open interest, however, is very low, and because of the liquidity, these are not options that I would trade on my account. If I were to play CHMT, it would be shares or nothing.

However, CHMT pays no dividend, so there's very little motivation to own shares, which don't allow the flexible strategies and leverage of options.

Implied volatility stands at 57%, in the lower quarter of the six-month range. It has been generally rising since mid-April.

Options traders are pricing in a 68.2% chance that the stock will close between $12.21 and $17.01 a month from now, for a maximum 16% gain or loss.

Chemtura next publishes earnings on July 30.

Decision for my account: I won't be trading CHMT for two reasons. One is the lack of liquid options. It's a deal killer for me. The second is that I don't understand the recent rise. U.S. equities have been hammered by fears over the Europe debt crisis, and now CHMT rises because its stock is listed on a Euro-zone exchange?? I think not. I worried at possible explanations in the text above. At the end of the day, I have no explanation. CHMT's rise is a mystery.

Also, internal to my account, I'm reluctant to commit funds to new positions until the mid-June options expiration, when I'll line up a new set of diagonal spreads. I want to stay liquid for that happy task.

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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