Thursday, September 27, 2012

MW: Growth and income

The Men's Warehouse Inc. (MW) on Monday fell below its 10-day low, moving out of Turtle Trading bull phase into neutrality for the first time since early August.

From its Aug. 2 low of $25.97, the stock rose 49% to $38.59 on Sept. 7. Not bad for a month plus change.

The price has sense retreated by 12% to $34.09 on Sept. 26. Today marks the first intra-day rise since the stock broke below the 10-day low, setting up the possibility -- underline possibility -- that today marks a higher low in a zag that sets up a new zig to the upside.

I came across MW, not through a scan for Turtle Trading breakouts (you can read the rules here), but rather because of the stock analysis aggregator Zacks.

Zacks makes a few of its picks public each day to non-subscribers, and today selected MW as its  growth and income selection. You'll find the Zacks analysis here. I haven't read it yet because I want my analysis to be independent of theirs.

Longer term, MW been trending upward since its recession low in late 2008. The trend has been marked by steep corrections to the downside, so its a roller coaster, not a tramway.

On the weekly chart, the most recent highest high is $40.97 in early March. A break above $38.59 would count as a continued uptrend on the daily chart, but the weekly chart trend requires a move above the higher $40.97 level.

MW reached its September peak on the second day after a 10% opening gap to the upside that followed a negative earnings surprise. Traders clearly liked the financial details and the accompanying guidance.

By the Turtle Trading rules, it will take a break above $38.59 to produce a bull signal. A break below the 20-day low, $30.85 as of today and rising, would be a bear signal.

By Turtle rules, this is not a tradeable stock as it stands today. My point is that the Turtle strategy turns negative events, such as an exit from bull phase, into a set up for the next trade. Like all bilateral strategies, which take trades in both directions, it requires a very dynamic mindset when reading charts.

Certainly, the handful of analysts following the company are enamored with its prospects. Their enthusiasm index stands at 71%.

The Men's Wearhouse earns its living selling suits from 1,166 retail stores in the United States and Canada. It also rents tuxedos. A video on their web site claims that Men's Wearhouse sells one out of every five suits bought in the U.S.

The company's niche is guys like me that don't want to give a lot of effort to buying or maintaining a formal wardrobe. They aim to make both easy while providing quality and value.

It has paid off with a reasonable return on equity of 12% achieved with zero long-term debt. Annual earnings took a dive in 2010 but recovered sharply and steadily the next two years.

The quarterly earnings peak in the company's fiscal 2nd quarter, which covers summer. Earnings for that quarter rose in 2011 and 2012 compared to the year-ago quarter. The company's 4th quarter, which covers the dead of winter, consistently produces losses.

Eleven of the last 12 quarters have produced upside earnings surprises, and one has surprised to the downside.

Institutions own nearly all the shares (I can feel the love just looking at the numbers!) and yet the stock price, like the suits, is a bargain. It takes just 72 cents in shares to control a dollar in sales.

MW on average trades 666,000 shares a day. It's liquid, but below the levels of liquidity that I generally seek out.

Even so, it has a good selection of option strike prices with near-the-money open interest hitting triple digits on some strikes. The at-the-money call bid/ask spread is 15%, a bit higher than I like.

Implied volatility, at 29%, is in the cellar, near the six-month low. It took a huge dive when the price gapped upward on Sept. 6 and has been creeping sideways since.

Options are pricing in confidence that 68.2% of trades will fall between $31.87 and $37.73 over the next month, for a potential gain or loss of 8%.

Options aren't hugely active, with volume running at 70% of its five-day average. Calls lead at 13% above the average, compared to 56% below average for puts. Speculative sentiment is squarely in the bull column.

With less than two hours before the close, the fair-trade zone today runs from $34.43 to $34.95, encompassing 68.2% of transactions surrounding the most-traded price, $34.75.

The Men's Wearhouse next publishes earnings on Dec. 5. The stock goes ex-dividend on Dec. 7 for a quarterly payout yielding 2.07% annualized.

Decision for my account: I won't be trading MW today absent a Turtle-Trading signal. Nor do I see it as a trade absent some indication that the correction has ended. In the decline from the early September high, there was a four-day pause with $38.75 or so being the ceiling. A break above that level would suggest to me that the uptrend had resumed.

I shall be setting up alerts for Turtle breakouts on MW. Trading lore says that implied volatility tends to return to the mean. With MW's implied volatility at such a low extreme, diagonal spreads will profit from the reversion, although the liquidity is way lower than any diagonal I've ever opened.

Oh, and Zacks says MW is a growth and income play. So one strategy is to simply buy the stock in an uptrend and collect the dividend in December, along with some capital gains. That foregoes the possibility of leverage, but a round lot of 100 shares would allow a trader to sell covered calls against the position for income.

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