Monday, August 13, 2012

TRAK: Dueling analyses

DealerTrack Holdings Inc. (TRAK) fell below its 20-day low on Monday, a bearish entry signal for traders following the Turtle strategy. (Click here for a pdf file of the rules.)

The breakout came during a sideways pause following a rapid rise from $14.01 in early October 2011 to a swing high of $31.98 on May 10. The sidewinder has run from about $27.50 to $31.75, with the occasional foray further on either side.

What immediately jumps out is the discrepancy between the Turtle momentum signal and standard trend analysis.

Trend analysis pegs TRAK as being in an uptrend over the mid-term. Near term, the price has risen from a low of $25.20 set June 12 to a high of $30.77 on July 5, a level that it has retreated from slightly.

The near-term price movement suggests the possibility of a failure in the uptrend -- the reversal came below the $31.98 swing high -- but it would take a drop below $25.20 to thrown the near-term into a downtrend.

Turtle analysis says that a breakout  below the 20-day low, $27.82, must be taken as a bear play, with an initial stop/loss set at around $29.56 or above (the stop depends upon the trader's entry price).

The 55-day low, a more powerful momentum signal in the Turtle vocabulary, stands at $25.20. A push below that level would bring both near-term trend analysis and the Turtle analysis into line.

DealerTrack Holdings provides online software applications used in managing and marketing an auto dealership and associated service and finance operations. The Lake Success, New York company serves 17,000 dealers and more than 1,000 lenders.

Bottom line: They're a player.

Analysts swing to the negative side in looking at DealerTrack's business, unsurprising when considering an industry that is deeply vulnerable to economic downturns and consumer angst.

Analyst enthusiasm for TRAK is running at negative 25%, the same as a month earlier. I calculate enthusiasm by giving positive weight to Strong Buy recommendations, ignoring Buys, and giving negative weight to Holds, Sells and Strong Sells.

DealerTrack shows return on equity of 7% -- not the mark of a high flyer -- with long-term debt running at 28% of equity. The company showed its first post-recession profit in 2011 following two  years of losses.

Quarterly earnings vary from quarter to quarter -- there is no trend. The last 12 quarters have all shown positive results, and 10 have produced upside earnings surprises, with two surprising to the downside. The 3rd quarter of 2011 and the 2nd quarter of 2012 were both stand-out earnings peaks.

Institutions own nearly all of TRAK's shares, and they've bid up the price to a premium level. It takes $3.24 in shares to control a dollar in sales.

On average TRAK trades 271,000 shares a day. That level supports only a limited choice of options with low-to-non-existent open interest. The spread for front-month at-the-money calls is 13%, and for puts, 12% -- not low but also not punishingly high.

Implied volatility stands at 49%, about the middle of the six-month range. It has been fluctuating in a sideways band since late July.

Traders are pricing in confidence that 68.2% of trades will fall between $24 and $31.92 over the next month, for a 14% potential gain or loss.

Options trading on Monday can be best characterized as schizophrenic. Option volume is running at 1.5% of the 5-day average. While calls are trading at 3.2% of average volume, puts are at 28%. Neither level is hugely active, but the puts are trumping the calls by a fair margin.

DealerTrack next publishes earnings on Nov. 5.

Decision for my account: Working purely from trend analysis, I would count TRAK as a probable bull play on any move above $30.77. By the Turtle analysis, of course, there is no need for discussion: There was a signal, and the bear play must be taken. End of story.

One project I've had in progress this month is to formulate rules and methods for again bringing Turtle trading into my strategy mix. I'll post more on that near the end of August, when I've returned to the States from my travels in East Asia.

With that project in mind, I've chosen the Turtle path for TRAK and opened a bear position. Although option selection and open interest are unacceptably low for complex spreads, the Turtle method uses unhedged positions. So I've simply bought put options expiring in January with a $35 strike price.

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