Monday, August 27, 2012

URBN: After the quantum leap

Urban Outfitters Inc. (URBN) is a quantum-leap stock. It was happily trading between $30 and $32 in a laid-back sideways trend when it beat earnings estimates by 29%. Bam! The price leaps to $36.91.

A quantum leap. Like an electron jumping in an instant to a new orbit.

And I'm never quite sure how to trade quantum-leap stocks. It's as though the stock's history has been wiped from memory. As a chart reader, I've left with very little to guide me in making trading decisions.

In the case of URBN, the stock has traded within the range of the quantum-leap day for four subsequent days, which must count as a sideways trend.

Urban Outfitters operates 400 fashion and household products stores and five retail brands: The eponymous Urban Outfitters, plus Anthropologie, Free People, Terrain and BHLDN.

The Philadelpha, Pennsylvania company began with funk, gravitated to bohemian, ironic hipster and kitsch, and now has luxury brands and designer collaborations in its inventory.

URBN has drawn my interest not only because of the quantum leap problem, which deserves discussion, but also because the stock analysis company Zacks is featuring URBN as its publicly available aggressive growth pick today. You can read their write-up here. I haven't read it yet to ensure that my own analysis is independent of theirs.

When the near-term analysis is in doubt, I always look a the longer-term position of the chart.

Although URBN is in a near-term sideways trend (following the leap), the weekly chart shows it to have been in an uptrend from $22.20 in early October, with a correction from the recession-recovery uptrend that began from $16.40 in April 2009. That larger trend peaked at $40.84 in April 2010.

The quantum leap brought the price well above its 55-day high, triggering a bull signal within the Turtle Trading method. (You can read my favorite Turtle Trading explainer here.)

The price has yet to break above the new 55-day high of $37.68. A drop below $34.61 (or so) would end the Turtle bull signal.

Side note: Under the strict Turtle rules, the trader opens a position when the signal comes, not four days later. However, given the magnitude of the move and the fact that the price has not yet risen much above the signal-day entry point, I would be comfortable taking the trade under Turtle rules.

Analyst enthusiasm is running at 4%, a turn-around from a negative 4% a month ago. I score enthsuiasm by subtracting hold and worse recommendations from strong buy recommendations, and ignore the buy recommendations entirely.

Urban Outfitters is showing return on equity of 17% -- not growth-stock territory but sitll quite high. It has no long-term debt.

Annual earnings rose rapidly post recession until 2011, when they dropped sharply, nearly to the 2009 level. Quarterly earnings have never again reached the peaks set in 2010 and this year were in fact declining until the 2nd quarter earnings surprise that prompted the quantum leap.

Of the past 12 quarters, nine have shown upside earnings surprises and three to the downside.

Institutions own 77% of shares. It takes $2.07 in stock to control a dollar in sales.

The ROE and lack of debt are quite attractive for a value play. The lack of earnings acceleration and the high price in comparison to sales are less attractive.

If I were trading for value, I would also look at crowded fashion and household goods sector where URBN earns its living. That's a lot of competition to overcome in search of profit.

On average URBN trades 5 million shares a day, a level of liquidity that supports a great selection of option strike prices with high open interest and very low bid/ask spreads -- only 6% for the at-the-money front-month calls. It is an excellent option trading playground.

Implied volatility stands at 30%, at the bottom of the six-month range. It dropped like a rock on quantum-leap day from a six-month high of 46%. Options are pricing in confidence that 68.2% of trades over the next month will fall between $33.67 and $40.07, for a maximum profit or loss of 9%.

Options are trading at only 14% of their five-day average volume, with puts having a slight edge over calls.

The stock is now trading within the fair price zone, which runs from $36.83 to $37.01 and encompasses 68.2% of trades.

Urban Outfitters next publishes earnings on Nov. 12.

Decision for my account: Quantum leaps make me nervous. I would be comfortable opening a position if URBN set a new 55-day high under Turtle rules. Otherwise, I think not. The low option volume suggests there's not a lot of new money coming in after the leap. The non-trending earnings suggest there may well be ample reason for analysts to bad-mouth the company between now and November. So I'm passing for now, but will keep it on my radar.

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