MINI: A low-liquidity trade with good odds

Since things were so dull with the highly liquid stocks and exchange-traded funds that normally are my trading playground, I tried something different: Analysis and a report on stocks and ETFs tracked by Zacks that have average volume of less than 500,000, with prices of $5 and up.

The analysis of the 1,759 stocks in the universe took nearly 2-1/2 hours to run, but it finished in time for a quick report, analysis and (spoiler) a trade. (I also mistakenly left optionable as a parameter in my search, which limited the number of stocks I analyzed this time around.)

Why go for the small fry at all? They aren't suitable for options trading, generally, and so lack the possibility of leverage.

I'm interested because they help to further diversify my portfolio. Big companies are sort of alike, in a way. The variety is much greater the further down the food chain I go. Moreover, with so few signals from the more liquid issues, I have too much cash sitting idle. This is a way to put it to work, despite the lower returns in this non-leveraged environment.

Altogether, the analysis uncovered 32 breakouts beyond the 20-day price channel. Sixteen were removed from consideration because they'll be reporting earnings in the next 30 days.

Of the 16 remaining, one broke out to the downside and the rest to the upside.

Only three had better than even odds in favor of success.

Of those three winners, I selected the storage company Mobile Mini Inc. (MINI) for deeper analysis.

Mobile Mini, headquartered in Tempe, Arizona, provides portable storage units to companies in sectors such as construction, consumer services and retail, and industry. It has a fleet of 237, 600 units and operates from 133 locations in North America and Europe.

MINI has a success rate of 57% in bullish trades, with an average net yield of 12.2%. That provides a yield adjusted for success of 7%, which is sufficiently high for my needs.

The stock has been trading sideways since Jan. 3, and yesterday's breakout, above the 20-day high of  $22.72, brought it above that range for the first time. It was confirmed today by a further price rise.

Big picture, MINI has been in an uptrend since June 2012. The current rise has put the price at the level of the prior major swing high, $23.08, attained in February 2012.

Only a handful of analysts follow MINI, and they are a wash when it comes to enthusiasm for the stock; the enthusiasm index based on their collective opinions works out to zero.

The company's financials fall in the slow and steady category, with a return on equity of 5% and debt at only 25% of equity. On the books, it's far from being a shooting star.

Earnings have tended to peak in the 4th quarter and has reached higher highs compared to the year ago quarter in both 2011 and 2010. The 2012 4th quarter numbers aren't out yet, but the 3rd quarter earnings exceeded those prior 4th quarter results.

MINI has surprised to the upside in four of the past 11 quarters, and to the downside in six quarters. One quarter was right on analyst expectations.

Institutions own 85% of shares, which is astounding for such a small player, and have bid up the price to where it takes $2.75 in shares to control a dollar in sales.

Forget the analysts. Those two figures suggest that the smart money is bullish on MINI.

MINI on average trades 149,000 shares a day, supporting a moderate selection of option strike prices. Open interest, however, is in the two- and one-figure range. The front-month at-the-money call options has a 28% bid/ask spread. That's huge. 

These are not options I would consider trading. It's shares only with this puppy.

However, I can use the options trading to gauge trader expectations.

Implied volatility stands at 30% and has been trending mainly sideways since last August, with a few bumps. 

Options are pricing in confidence that 68.2% of trades will fall between $21.02 and $25.02 over the next month, for a potential gain or loss of 9%, and between $22.06 and $23.68 over the next week.

Call options are trading very activity, at more than four times their five-day average volume. Puts are languishing at 54% of average volume.

The closing bell has rung, so we're talking history from this point.

The fair-price zone on today's 30-minute chart ran from $22.93 to $23.13, encompassing 68.2% of transactions surrounding the most-traded price, $23.02. The price closed within the zone and just above the most-traded level.

MINI next publishes earnigs on Feb. 22.

Decision for my account: I took the trade based on the odds. Also, the financials weren't awful, and the stock price spread was at 2 cents, which is quite reasonable. I structured the trade as long shares. Very simple.

Going forward, I think I'll be adding these lower liquidity issues permanently to my trading routine. There is some question as to whether I should leave "optionable" as a parameter, even though the options on these small fry are too illiquid for trading under my rules. The parameter ensures that I can perform volatility analysis, which is important, and also, I would think, weeds out some less-than-serious contenders in the marketplace. I shall decide next week.

References

My trading rules can be read here.  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.