Thursday, September 6, 2012

VMED: Bullish breakout

Virgin Media Inc. (VMED), the giant British communications/entertainment company, broke sharply above its highest price of the past 55 days. The company announced that the Samsung Galaxy smart phones were becoming available on Virgin Mobile USA.

The break above $28.19 broke free of a sideways trend that has held sway since July 27.

The breakout produced a Turtle Trading bull signal, as well as one under the traditional trend analysis. The sideways trend generally ran from $28 down to $26.80. The price today so far has peaked at $29. A persistent retreat below $28 would negate the traditional trend analysis breakout. The Turtle Trading exit is presently at $26.82. (My explanation of the Turtle Trading rules can be found here.)

Although operating mainly in the U.K., Virgin Media is headquartered in New York and traded principally on the NASDAQ stock exchange.

Trader enthusiasm is running at 25%, up from 14% three months earlier.

Virgin reports return on equity of 18%, and returns have risen sharply over the last two quarters. The downside has been a heavy load of long-term debt amounting to nearly 12 times equity. That gives the company little leeway to adjust if its business runs into a rough patch.

Annual earnings tanked during the recession and have had a very weak recovery, showing a profit for the first time post-recession only last year.

Quarterly earnings have been, to use the technical term, pathetic. Five of the quarters showed a loss and six showed a profit. One came in at zero. Five quarters showed upside surprises, and seven surprised to the downside.

Interestingly, the losing quarters were all downside surprises, which may say something about the sunny optimism of analysts who analyze this company.

Institutions own nearly all the shares, and the price is near parity -- it takes $1.16 in shares to control a dollar in sales.

VMED on average trades 2.1 million shares a day, sufficient to support a wide selection of optoin strike prices, many with four-figure open interest. The bid/ask spread for at-the-money front-month calls is running at 9%.

Options are very active, with volume six times the five-day average. Calls are well ahead at 11 times the average, but puts are scarecely fallow, running as they are at three times average volume.

Implied volatility, at 26%, is near the six-month low. It has been crawling sideways since mid-August.

Options are pricing in confidence that 68.2% of trades will fall between $26.80 and $31.06 during the next month.

Today's fair-price zone stretches from $28.24 to $29 and encompasses 68.2% of transactions surrounding the most-traded price, $28.83. VMED is trading near the top of the zone 3-1/2 hours before the market close.

Virgin Media next publishes earnings on Oct. 24. The stock goes ex-dividend on Sept. 7 -- Friday -- for a quarterly payout yielding 0.55% annualized.

Decision for my account: I took the trade based on the Turtle bull signal, structuring it as long calls expiring in December with a $27 strike price, giving 7x leverage. I would have taken the trade based on traditional trend analysis, as well.

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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