Wednesday, July 18, 2012

Things are going ANN's way

Things are starting to go Ann's way. That's Ann Inc. (ANN), which sells women's clothing through its Ann Taylor and LOFT Outlet stores.

ANN began rising significantly on July 12 in what appears to be the end of a mid-term downtrend that carried the price from $29.81 on April 18 down to $24.17 on June 27.

Since then the price has carried to up to today's high (so far) of $26.54, or 10% above the swing low.

Big picture, ANN's recovery from the single-digit depths of the recession reached $32.49 in April 2011, and since then the price has traded within a somewhat sloppy range of around $22 to $30. Three times this year the price has reversed just short of $30. Even if that happens a fourth time, that still gives another 11% or so before the price hits the ceiling.

Ann Inc. operates 953 stores in 46 states, Washington, D.C. and Puerto Rico. The New York City company cultivates an image of classic women's apparel for career and casual, but without the stuffiness.

One promo reads, "Must-have looks: Sexy, sophisticated, sure to raise temperatures." That may be classic, but it's not my grandmother's classic.

Not only is ANN's chart perking up, the stock was added today to the Zacks top-buy list put together by the stock analysis company. Zacks makes a few of its picks available for free to everyone, and ANN was in today's batch.

I haven't read Zacks' analysis yet, to ensure my analysis is independent. You can read it here.

Enthusiasm for ANN among analysts stands at 15%, not especially high but room for improvement is good. The enthusiasm rating is unchanged from a month earlier.

Certainly there are good financial reasons for analysts to be happy with Ann Inc. The company reports return on equity of 24% with no long-term debt. That's a growth-stock profile.

Annual earnings have risen the past two years after two years of recession losses. Quarterly earnings are all over the place, without a trend. The closest thing to a seasonal peak is the 3rd quarter, but it doesn't stand out particularly from the 1st and 2nd quarters.

The company has shown a profit at least the past 11 quarters, with 10 upside earnings surprises and one to the downside.

Institutions are heavily invested, owning 95% of the shares. Yet the price is a bargain. It takes only 57 cents in shares to control a dollar in sales.

ANN on average trades 885,000 shares a day, meaning the stock, while liquid, is less so than most that I trade. Yet the options have a good selection of strike prices, with three-figure open interest and not-too-horrible bid/ask spreads. I could comfortably trade this options grid.

Implied volatility stands at 43%, about the middle of the six-month range. It has been zig-zagging gently upward since late June.

Options are pricing in confidence that 68.2% of trades will fall between $23.57 and $30.17, for a maximum gain or loss of 12%.

The stock is trading near the top of the five-day fair-price zone, which encompasses 68.2% of trades surrounding the most-traded price, $26.17. The zone runs from $25.07 to $26.94.

The present zone was mainly defined by a sideways trend from Friday through Tuesday, so if the present breakout from that very near term range is valid and backed by volume., a new fair-price zone will quickly be established.

Ann Inc. next publishes earnings on Aug. 17.

Decision for my account: The earnings announcement date suggests a short-term trade, such as a bull put vertical spread for credit. I would structure it as a trade expiring in August, long the $26 put and short the $24 put. 

If the price falls below $26.40 then than casts doubt on the break-out. The vertical I described is profitable at expiration down to about $25.50. The maximum profit on risk is 27%.

I like the chart and especially the financials. The liquidity is a concern, and the way to test that is to put in a limit order and see if it gets filled.

As it turns out, I had to lower my asking price in order to get a fill, reducing the potential profit to 25%. Not shabby, although I hate to give up profit. And I now have a position in ANN.

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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