In the process of whipsawing, ABC sliced through its low for the last 20 trading days, triggering a Turtle Trading bear signal. (Click here to read my favorite explanation of Turtle Trading and its rules.)
AmerisourceBergen, headquartered in Chesterbrook, Pennsylvania, runs a supply chain of brand-name and generic pharmaceuticals, serving health providers in the United States and Canada. They rank #27 among the Fortune 500.
Any sort of whipsaw move of that magnitude immediately puts me on my guard. On the one hand, it produced a bear signal and because of the retreat I'm able to open a position at a bargain price. On the other hand, what if the decline was just a knee-jerk reaction by brokerage computers and the higher price represents the market's longer-term judgment of ABC.
Ultimately, it comes down to my trading rules. I flagged ABC for Turtle Trading. In Turtle-land, all signals must be taken. My only choice lies in whether or not to include a stock or whatever within the trading universe.
ABC was one of 16 high-volume stocks that I added to my tradeable universe on Monday.
Since July 2011, ABC has been trading a sideways pattern ranging from about $36 up to $40, with a few breakouts on either side. While the Turtle rules are signalling a bearish downtrend, the chart can best be analyzed as a candidate for swing trading, with the trader waiting for a bounce before opening a bull position.
Analysts are collectively 45% enthusiastic about ABC. That's not an awful level, but it's down from 64% a month earlier. The decline was caused by a brokerage changing its recommendation from strong buy to hold.
(I score enthusiasm by giving points for strong buy recommendations, subtracting them for hold and worse, and ignoring buys.)
AmerisourceBergen has a high return on equity -- 25% -- with long-term debt running at 51% of equity -- higher than I like but not overly crippling.
Annual earnings have risen steadily from the 2008 recession low. The 2nd quarter is the best earner each year, and returns for Q2 have also risen steadily from 2010.
Out of the last 12 quarters, 10 have shown upside earnings surprises and two have surprised to the downside.
Institutional ownership is high, at 92% of shares, and the stock price is way low. It takes just 12 cents in shares to control a dollar of sales.
ABC on average trades 3.2 million shares a day, sufficient liquidity to support a good selection of options with a 10% bid/ask spread for the at-the-money front-month calls. Open interest is running in the four figures just below the money.
Implied volatility stands at 67%, about midway in the six-month range. Today's whipsaw reversed a decline from 80% on Aug. 3 down to 63% on Aug. 27.
Options are pricing in confidence that 68.2% of trades will fall between $30.33 and $44.91 over the next month, for a maximum gain or loss of 19%.
Options are trading 25% above their average volume for hte past five days, with puts running well above calls.
Today's fair price zone runs from $37.41 to $37.81 and encompasses 68.2% of trades surrounding the most traded price, $37.59.
AmerisourceBergen next publishes earnings on Nov. 11. The stock goes ex-dividend in November for a quarterly payout yielding 1.38% annualized.
Decision for my account: As noted in the text, ABC is a Turtle Trading stock for me. So under the rules, I had to take the bear signal. I structured it as the purchase of January puts with a strike price of $40. The options produce 7x leverage.
If I were trading the chart, I would tentatively treat the retreat from today's lows as a bounce within the sideways range but would wait for a move above today's high of $37.81 before opening a bull position with a $40 target.
Disclaimer
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