Wednesday, September 5, 2012

SWY: The Blackhawk Gap

When I hear the name Blackhawk, my thoughts stray far from gift cards. I think of crashed choppers in apocalyptic cityscapes, Blackhawk Down. But Safeway Inc. (SWY) jumped 4% this morning after announcing plans to spin off its Blackhawk Network gift-card unit via an IPO next year.

Call it Blackhawk Up.

The Pleasanton, California grocery chain will retain a minority stake in Blackhawk.

The opening gap reverses, potentially at least, a downtrend in place since February. It also broke through the high of the last 20 trading days, triggering a Turtle Trading bull signal. (My description of the Turtle Trading rules can be found here.)

One part of the Turtle method is to add to positions as they rise, up to three times following the initial opening. SWY sped through the trigger points in less than two hours.

The 20-day high was $16.35, and the price hit a high so far today of $17.03, although it has retraced all of that rise and more.

The $16.35 level also coincides to the nearest upside resistance, making the breakout legitimate in terms of traditional chart analysis.

But, it is a very bearish chart, and a reversal on news always makes me suspicious as a trader. Did the price leap soak up all of the upside momentum that news is likely to generate? Hard to say. What I can say is that by following the Turtle Trading rules, I am now heavily invested in SWY at an average basis well above today's post-gap opening price.

This is the dark side of Turtle Trading. It is, by its nature, indiscriminate. A more thoughtful approach would filter out news-based opening gaps. But that can also filter out great opportunities. For now, I'm following the Turtle rules that make the trade mandatory.

Certainly, before the spin-off, analysts were far from excited about SWY's prospects. Their combined recommendations score a negative 9% for enthusiasm, down from 7% a month earlier.

And certainly there are reasons to be sour on Safeway. Return on equity is 16%, a good level, to be sure. But long-term debt is a punishing 234% of equity.

Annual profits remain far from what they were before the recession, and 2011 actually saw a decline from 2010. This year so far, each quarters earnings has been higher than the year-ago quarter.

Of the last 12 quarters, all have been profitable and 10 have shown upside surprises. Two have surprised to the downside.

Institutions own nearly all the shares, and the price is in the cellar. It takes only 9 cents (9 cents!!!) in shares to control a dollar in sales.

It's foolish, but when I look at Safeway, laying by the road all battered and bruised, I think its a bargain that can't go anywhere but up. Foolish, as I said. Any stock can go down.

Battered though the company might be, SWY's options grid is a lively place, with a wide selection of strike prices and open interest mainly running to three and four figures. The bid/ask spread is a bit wide, at 18% for the at-the-money front-month calls.

The stock is highly liquid, on average trading 6.1 million shares a day.

Implied volatility stands at 34%, about the middle of the six-month range. It has been stair-stepping higher since Aug. 22, when it stood at 28%.

Options are pricing in confidence that 68.2% of trades will fall between $14.83 and $18.05 over the next month, for a potential gain or loss of 10%.

Options are trading at more than five times their five-day average volume, with calls ahead at eight times compared to double for puts.

The fair price zone runs from $16.20 to $16.86 and encompassed 68.2% of transactions surrounding the most-traded price, $16.51. The stock is trading within the zone 2-1/2 hours before the market closes.

Safeway next publishes earnings on Oct. 11. The stock goes ex-dividend in Sept. 18 for a quarterly payout yielding 4.25% annualized.

Decision for my account: Under the Turtle system the trade was mandatory, and I took it, structuring the position as long calls with a strike price of $15, a December expiration, and 6x leverage.

Had I been using traditional trend analysis, I would have been more cautious about the trade. The gap produced a higher high following a higher low, but the low wasn't much higher than its predecessor and it all looks pretty much like a sideways move to me. The clearest prior high is $18.31 on June 29, and the emerging uptrend would gain much clarity were that level to be breached. At the least, I would wait to see if today's high -- $17.03 -- was exceeded on a subsequent trading day before opening the position.

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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