Wednesday, September 19, 2012

SYY: A no-confidence breakout

Sysco Corp. (SYY), the company that trucks peas and carrots and many other foods to restaurants and hospital cafeterias around the country, broke through its 55-day high in the markets today, producing a Turtle Trading bull signal.

The break above $30.74 sets up a challenge to the prior swing high, $31.18, set early in the year.

SYY has been marking time on the chart since 2009 in a series of large swings with a ceiling of $32 and a floor of $27. May of 2011 saw a break above the $32 level that was followed by a retreat below the $27, which then pulled back up to within the range.

Turtle Trading rules (read about them here) are blunt instruments. They don't deal with such subtleties as sideways trends. A stock is either in bull phase, or bear phase, or neither.

In the case of SYY, though, I think it pays to look at the broader picture. Today's high (so far) is only 3% below the $32 ceiling. It's a breakout, but of the no-confidence variety.

A smart Turtle Trader will break the rules when that $32 level is reached and tighten stop/loss levels until it's clear the the stock won't retrace.

Houston-based Sysco was hit hard by the recession. It serves the dining-out business, with 400,000 clients. When people feel the economy crumble  beneath their feat, they stay home and eat cheap. When they grow confident, they start dining out again.

Things are still fairly gloomy in the job market, and that shows in analysts' assessment of Sysco -- they lack confidence in the company, which is another way of saying they have little confidence in consumer confidence, at least for the next earnings-reporting quarter.

The enthusiasm index for SYY is a miserable, negative 60%. If I traded based on analyst opinion (I don't) I would grab my chips and run from SYY as fast as my legs would carry me.

Yet, a closer look shows that Sysco's situation isn't bad at all. It has a return on equity of 25%, and long-term debt, while higher than I like, isn't at crippling levels. It amounts to 59% of equity.

Earnings are where the gloom comes from. The annual figures have been static for three years running. The peak quarter of the year -- the 4th -- declined this year compared to the corresponding quarter in 2011.

Of the last 12 quarters, seven have shown upside surprises, four surprised to the downside, and one was surprise-free.

Institutions own 74% of shares, which can be bought today at bargain-basement prices. It takes only 43 cents in shares to control a dollar in sales.

All in all, it's an interesting set of numbers. Looking at returns and earnings, SYY looks like a growth stock that has fallen on hard times. Looking at the price, it appears to be a value play.

Of course, we're all chart people, yes? We don't care about the financials, just what the chart shows.

SYY on average trades 3.2 million shares a day and supports a moderate selection of option strike prices. Open interest is as much as four figures on some strikes, but it is distributed very narrowly-- the outlying strikes have no open interest at all.

Bid/ask spreads are fairly high, amounting to 33% on the front-month at-the-money calls.

Implied volatility stands at 13%, about the middle of the six-month range. It has been stair-stepping down since late August.

Options are pricing in confidence that 68.2% of trades will fall between $29.93 and $32.21 over the next month, for a potential maximum gain or loss of 4%. This is not a highly volatile stock.

Options are trading actively, at 43% above their five-day volume. Calls lead at 64% above average volume, compared to 10% for puts.

Today's fair-price zone runs from $30.57 and $31, encompassing 68.2% of transactions surrounding the most traded price, $30.84. The stock is trading above the fair-price zone with two hours of trading remaining before the close.

Sysco next publishes earnings on Nov. 7. the stock goes ex-dividend on Oct. 3 for a quarterly payout yielding 3.47% annualized.

Decision for my account: I have no decision to make on this trade. I'm over-committed to bull trades under the Turtle Trading rules. I'll need to close some positions, as stops are hit, before I can trade uptrending stocks again.

If I were trading SYY, I would structure it as January calls at the $30 strike, for 14x leverage. Assuming entry at $31.07, the initial stop/loss would be $30.82 (the entry price minus double the average true range). 

Once the price moved above $32, I would narrow the stop to 13 cents below the peak price, running it as a trailing stop as new highs were set. I would switch back to the Turtle Trading stop -- the 10-day low -- once that level came close to the trailing stop.

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.

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