Since January 2009 GGC has been profitable in seven out of every 10 breakouts to the upside, with the net gain of successful trades averaging 19.9%. Adjusting the average gain by the success rate (71.4%) gives a score of 14.2%.
Altogether GGC has broken the price channel 31 times in the period I'm tracking, 15 of those to the upside.
GGC has been stairstepping higher since October 2011. The rise of the past two weeks ends a correction that drew the price down to $39.65.
GGC was one of nine stocks that broke beyond their price channels on Wednesday, six to the upside and three to the downside. The success rates in the direction of breakout range from 71.4% down to 60%, the average profits from successful trades in the breakout direction from 21.3% down to 3.7%, and the profits adjusted by the success rates from 14.2% down to 1.8%.
Georgia Gulf , headquartered in Atlanta, Georgia, is a major manufacturer of chemicals with wide industrial application, and also produces building materials. The company's products are used to make high performance plastics, pulp and paper, packaging. They also have application in medicine, including pharmaceuticals.
Perhaps it's because Georgia Gulf's industry has an old-line and stodgy feel to it -- "plastics" has been a laugh line ever since The Graduate hit the movie screens in 1967 -- analysts are unimpressed by the stock.
They collectively give it an enthusiasm index of a negative 14%, which is a bit puzzling given the company's numbers.
Georgia Gulf reports return on equity of 17%, which is not far below growth-stock territory. Long-term debt is far higher than I like, at 96% of equity, but still, these are not figures that indicate a struggling company.
Earnings the past 12 quarters have been all over the place, without a trend, but profitable for the past 10 quarters. Earnings tend to peak in summer 3rd quarter, and the most recent 3rd quarter report showed earnings that were nearly double the previous 3rd-quarter best. Looking at the 3rd quarter alone, there's a discernible uptrend in earnings.
Georgia Gulf has surprised to the upside 10 times in the last 12 quarters (including the two losing quarters back in 2009/2010), and twice to the downside.
Institutions own nearly all the shares, yet the price is extremely cheap. It takes only 50 cents in shares to control a dollar in sales.
On average GGC trades 2.7 million shares a day an supports an adequate selection of option strike prices with open interest near the money running mainly in the four figures, with some outliers in three and five figures.
The front-month at-the-money call option has a 9.1% bid/ask spread, which is tending toward the high side for a stock with that much trading volume.
Implied volatility is high, at 54%, and stands near the maximum of the last six months. It was on the rise on Jan. 7 and Jan. 8 but faltered on the 9th before recovering somewhat today.
Options are pricing in confidence that 68.2% of trades will fall between $39.84 and $54.68 over the next month, for a potential gain or loss of 16%, and between $43.69 and $50.83 over the next week.
Call options are trading 7% above their average volume of the past five days, and puts are trading at about 15% below the average volume.
The fair-price zone on today's 30-minute chart runs from $46.89 to $47.41, encompassing 68.2% of transactions surrounding the most-traded price, $47.20. Five hours before the close, GGC was trading within the zone and near the most-traded price. It's not a particularly bullish pattern from a one-day perspective, but not bearish either.
Georgia Gulf next publishes earnings on Feb. 11. The stock goes ex-dividend sometime in March for a quarterly payout yielding 0.68% at today's prices.
Decision for my account: I've opened a bull position on GGC, structuring it as a bull put option spread expiring Feb. 15, short the $45 put and long the $40 put. This makes the trade profitable down to $43.64, providing a 7.5% cushion below my entry point. Maximum yield is about 21%.
My decision was based primarily on the historical odds of success when GGC breaks out to the upside and the average potential gain on successful trades. I'm not crazy about the price to sales ratio. Prices that low are usually low for a reason. But there's nothing to hate about the stock.
References
My trading rules can be read here. (They don't talk about the trend score because I'm still developing the tool.) A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.
And the classic Turtle Trading rules on which my rules are based can be read here.
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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