Tuesday, July 31, 2012

NUS: Anti-aging drama queen

Who would have thought that wrinkles could produce such great returns?

Nu Skin Enterprises Inc. (NUS) develops and distributes products that are said to slow the ravages of time -- anti-aging products that will, among other things, reset your "Youth Gene Clusters to their youthful patterns of activity" (as the company's website says).

Aging people are certainly a huge market -- we all eventually pick up on the fact that we are losing our youthful glows -- and serving that market has allowed the Provo, Utah company to consistently bring back returns on equity exceeding 30%.

It operates globally -- 88% of revenues lat year came from outside the United States.

The stock chart, however, shows that NUS investors are a nervous lot, prone to massive sell-offs even when the company shows upside earnings surprises.

The most recent of these, in late April, hammered the stock down by 33% in 14 truly awful days for people who were long in the stock. 

The news archives give not a clue to the cause of the decline. Earnings the day the fall began had come in 5% above analysts estimates. Within the next week the company announced an increase in share repurchases, declared a quarterly dividend, and raised its 2012 guidance.

A play on NUS at this point is a bet on whether the price will succeed in clawing its way out of the rubble.

The free-fall hit bottom on May 15 at $40.02. On June 5 the price began a zig-zag upwards from $40.21, hit a higher high in the post-decline period of $49.14 on July 9, corrected, and then began a two-day push that ended last Friday at yet another higher high of $51.76. The price has moved sideways in a narrow range (so far) in the two days that followed.

The most recent rise came with a volume spike and followed publication of a 6% upside earnings surprise.

The company's most recent return on equity was 34%, with debt at 34% of equity.

Annual earnings have risen steadily since 2007 -- Nu Skin showed no recession reversal. 

Only two of the last 12 quarterly reports has shown a decline from the prior quarter, and all 12 have shown upside earnings surprises.

Analysts are in love with this stock. My enthusiasm index for NUS is running at 100%.

Institutions own 82% of shares. The price is a bit above parity. It takes $1.77 in shares to control a dollar in sales.

In a rational world, NUS's chart would be on an uninterrupted rise. Yet its price has the sudden leaps and air pockets of a start-up facing uncertain prospects. 

Some stock charts bring to mind sober executives coldly discussing rational plans for increasing profits. NUS, by contrast, behaves on the chart like a drama queen.

Of course, market drama can be of benefit to a trader who takes positions favoring volatility, as I often do. Implied volatility for NUS stands at 62%, a bit above the mid-point of the six-month range. 

Volume on average runs at 1.1 million shares a day, and consequently the options selection is in that awkward space between awful and awesome. Strike prices are at $5 intervals. Open interest is adequate for a few strikes, and bid/ask spreads are acceptable.

With a stock having volume this low, the trader never knows how liquid it really is until he or she places a limit trade and sees how quickly it is filled.

Options are trading at volume well below the five-day moving average. Overall, volume is running at about 60% of the average, with calls having a 25 percentage point edge on puts.

Options are pricing in confidence that 68.2% of trades will fall between $42.20 and $60.48 over the next month, for a potential gain or loss of 18%.

NUS is trading near the top of today's fair price zone, which ranges from $51.03 to $51.40, encompassing 69.2% of transactions surrounding the most traded price, $51.14.

Nu Skin next publishes earnings on Oct. 22. the stock goes ex-dividend in August for a quarterly payout yielding 1.56% annualized.

Decision for my account: Given the high volatility and chart's tendency for drama, I would only play NUS as an options spread. I want some protection against decline and am willing to limit profits to achieve that goal.

At this point in the cycle it's too late to open August option spreads and too early for September's. So I'll wait until next week and see what the price has done then.

But the finances are great, consistently. Structured right, I'm inclined to favor a NUS position among my holdings.

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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