Wednesday, October 3, 2012

AMWD: Knock on wood

American Woodmark Corp. (AMWD) makes kitchen cabinets and vanities for new homes and remodeling projects. Altogether, it has 500 different cable lines.

It's also a small-cap stock, with a market capitalization of only $314 million. That has not been my usual trading venue up to now, that and that is, quite frankly, a flaw in my account management.

The more varied an account's holdings, the less likely everything is to move in lockstep. It's like nature: A complex ecosystem is more robust in the face of disaster than is a monoculture. If you put all of your funds in Facebook shares, you may never recover.

I have up to now been running two strategies.

The first is diagonal spreads on index options, such as those on the S&P 500, and options on very large corporate shares such as AAPL.

The second is Turtle Trading, a trend following system. I use options for leverage, which limits me to more liquid stocks, generally those trading 4 million shares a day or greater.

Both strategies are heavily reliant on large-cap stocks.

My AMWD position marks the start of a new strategy that will increase my diversity by adding in shares of small- and mid-cap stocks. For the present, I'm using selections from those labelled aggressive growth by Brian Bolan, an analyst at You can find him on his Facebook professional page here. His analysis of AMWD is available here.

I may branch out later.

Of course, I never trade without a technical signal. To diversify that part of my operation, I've decided to go with proprietary Person's Pivot Study (pps). The pps gives a unambiguous bull and bear signals. John Person, the developer, describes how it works here.

The pps, actually flips fairly often. AMWD's six-month chart shows 22 signals, alternating between bullish and bearish. That will eat up a lot of trading fees very quickly, something that makes no sense for an unleveraged play.

So my purpose in the using the pps is have some expectation of a near-term price rise to get me away from my entry price.

I won't be using the pps bear signals to exit. Instead, I'll set up a trailing stop/loss equal to double the 20-day average of each day's price movement. So the pps is an entry signal, but I'm giving the price room to fluctuate for the exit.

New strategy, new pool of stocks. What could go wrong? Knock on wood.

AMWD moved to pps bull phase on Oct. 2, when it opened at $20.57. Four hours into trading today it began to rise. It peaked at $21.70 before pulling back.

The price began its current leg up on Sept. 27 from $19.31, and that leg is part of a longer-term rise that began Aug. 14 at $17.31. On the weekly chart, AMWD has been in an uptrend since mid-December 2011, when it bottomed at $10.88.

It has had a good enough run to attract a handful of analysts, whose opinions run the gamut from strong buy to strong sell. Their consensus works out to an enthusiasm index of 20%; three months ago it was negative 20%, so there has been some improvement.

American Woodmark, of Winchester, Virginia, has been around since 1980. It operates 14 manufacturing centers in nine states. This is not a struggling start-up by any means.

The company reports return on equity of a negative 4.9% -- a dismal level. Long-term debt, however, is only 18% of equity, so it's not an entirely dismal picture.

Earnings -- well, in the annual reports, there haven't been any since 2008. It has been losses ever since.

The company on Aug. 21 reported its first quarterly earnings stretching back to at least 2010. Before that, it has been losses. Six of the 12 quarters showed upside earnings surprises, and six surprised to the downside.

 Institutions, to my surprise, own 59% of shares, and the price is cheap; it takes just 57 cents in shares to control a dollar in sales. (And sales have been growing: They're up 13% over the prior year.)

AMWD, on average, trades 53,000 shares a day. There are no options on this stock.

The fair-price zone on the 24-hour minute chart runs from $20.55 to $21.08, encompassing 68.2% of transactions surrounding the most traded price, $20.81. With 90 minutes to go before close, AMWD has been trading above the fair-price zone for much of the afternoon.

American Woodmark next publishes earnings on Nov. 21.

Decision for my account: So this is the kind of stock that traders buy hoping to get in before a recovery in the company's fortunes gets general recognition. And may it will recover, and maybe it won't. 

If I were a fundamentals trader, I would be running away as quick as my legs would carry me. The chart, however, looks pretty good -- it's had to argue with an uptrend that has continued for 10 solid months. And the company is a survivor, with 32 years of history.

I bought shares at an entry price of $21.19. The trailing stop is $1.65 below the peak price set after the stop was put in place.

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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