Tuesday, June 5, 2012

MRH: Insurance and reinsurance

Montpelier Re Holdings Ltd (MRH) is an insurance and reinsurance company with subsidiaries in Bermuda, the United States, the United Kingdom and Switzerland.

Reinsurance is what stands behind the insurance company you bought your policies from. Your insurance company passes some of that risk off to reinsurance issuers like Montpelier.

The Bermuda-based company focuses on property and casualty reinsurance but also writes policies itself in such specialized areas as aviation, personal accident catastrophe, workers' comp and terrorism.

Montpelier had one of the most bullish charts among 16 higher volume stocks that analysts consider to be strong buys.

In truth, it was among a sickly litter, but in the markets of late, a trader must deal with what's on the screen. As my former lawyer was wont to say, with air of gravity as though imparting the wisdom of an Aristotle, "It is what it is."

MRH began its most recent leg up with a price spike on April 26 after reporting a 90% earnings surprise. The day carried the price from $19.87 at the open to a high of $21. Since then the price has move sideways between $20.30 and $21, with a downward spike to $19.89 that quickly retraced back into range.

While within the range the volume has tended to be higher on up days than on down days, so it can count as a potential bullish setup, once the price pushes past the $21 level.

That level is historically significant. The stock hit $21.03 as a post-recession high in February 2011, before falling nearly to $15. It has clawed its way entirely out of the cellar, but has paused.

MRH represents a classic breakout situation. For the trader, always, in these cases the question is whether to get in before the breakout in anticipation of an explosive move upward, or to wait for the breakout and possibly miss out on a dramatic rise.

I tend to be the get in early sort with a stop/loss set below the range. In this case I would be looking to take my loss at about the $20 level.

Financially, Montpelier is something less than a barn-burner, with return on equity of 6%. Long-term debt, however, is low, at 20% of equity.

Institutions own a stunning 97% of shares -- they love this company -- and yet, the price remains relatively low: It takes only $1.64 in shares to control a dollar in sales.

Earnings have been all over the place, with losses in three of the last six quarters. Four of the quarters, including two losers, reported upside earnings surprises, and there have been two downside surprises.

MRH on average trades 533,000 shares a day. That supports only a small selection of option strike prices, with low open interest and wide bid/ask spreads. I wouldn't touch these options, myself; it would be shares or nothing, with the resulting limits on strategy.

Options volume is way low, indicating that there is little short-term speculative play. It stands at only 41% of the five-day average volume.

Implied volatility is 36%, at the low end of the six-month range and showing a very slight decline since mid-April.

Traders are pricing in a 68.2% chance that the price will close between $18.57 and $22.85 a month from now, for a maximum gain or loss of 10%.

The company next publishes earnings on July 26. It goes ex-dividend in June for a quarterly payout yielding 2.03% annualized.

Decision for my account: The dividend is high enough to make shares worthwhile, a good thing, since the options don't meet my criteria for trading. If I were to play it, I would buy shares in hope of a breakout, but with a stop/loss at $19.95.

However, my trading funds are committed and I won't be trading MRH at this time.

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.

No comments:

Post a Comment