Wednesday, March 20, 2013

HAIN: Celestial bull play

Update 4/12 2013: I've completed my strategic closure of HAIN, buying back my short vertical spreads. The final result for the underlying stock is a 0.7% gain and for the vertical spread, a 20.3% profit (the premium less the cost of buying back the position as a percentage of maximum risk.)

HAIN has dropped off its highs beginning on April 11 (yesterday). I don't intend to roll to a continuation of the position but instead shall wait for a new bull or bear signal. Earnings are to be published on May 2, so until that date HAIN is in my 30-day earnings exclusion period.

Update 4/4/2013: HAIN on April 4 broke below $59.72 -- the lower boundary of its 10-day price channel -- triggering closure of a potion of my bull position for a 1.2% loss on the underlying stock.

My HAIN position was complex: Short vertical option spreads expiring in April for the initial position and the 1st add, and long calls for the 2nd add. The long calls were closed immediately upon the signal for a 4.3% loss on the underlying and a 25.3% loss on the calls themselves.

In accordance with my rules, I'll continue to hold the spreads with a stop/loss at the breakeven point, $58.91. The verticals will be closed at a profit if the price stands above the break-even point on the April 20 expiration. 

Hain Celestial Group Inc. (HAIN) broke above its 20-day price channel on Tuesday. The bull signal was confirmed the next day as the stock traded beyond the $60.23 breakout level.

It was the 17th bull signal by HAIN since the broad markets began their recovery from the post-recession crash in early 2009. Ten of the 16 prior breakouts were profitable, producing an average yield of 9.4%.

HAIN has been moving sideways all of this year in a correction from the Sept. 6, 2012 peak of $73.72, with a channel floor of about $51.50 and a ceiling of about $61.90.

The final leg of the rise to the September 2012 high began in August 2011 from $26.10. From then to the present HAIN has broken out to the upside six times. Three of the five prior breakouts was profitable, with an average gain of 15.5%.

In the rise from August 2011 to the September 2012 high, HAIN paused in the $50 to $58 range, spiking down to a low of $49.63. That low has not been pierced in the present correction, and so HAIN has not set a lower low and remains in an uptrend.

HAIN was one of four breakout stocks that survived my initial screening. (See my post on Tuesday's breakouts.) Two of those stocks moved back within their price channels and failed confirmation. HAIN has a higher volume than the other confirmed stock, RLGY. My rule of thumb is to prefer higher volumes over lower. Also, HAIN has greater option liquidity.

The company, headquartered in Melville, New York, makes natural and organic products under a variety of brand names, such as Celestial Seasonings, Rice Dream, Soy Dream and Earth's Best.

Analysts' collective opinion gives HAIN a 21% enthusiasm rating. That's less than a happy group hug but is optimistic about the company's prospects.

Hain Celestial Group reports return on equity of 10%, not a growth stock level but still respectable. The debt is higher than I like, at 57% of equity.

The company has been profitable for at least the last 12 quarters. Earnings in each of the 2012 quarters exceeded its counterpart in 2011, which in turn exceeded the 2010 counterparts.

Earnings surprised to the upside 10 times, and to the downside, twice.

Institutions own nearly all of HAIN shares, and the price has been bid up a bit. It takes $1.84 in shares to control a dollar in sales.

HAIN on average trades 744,000 shares a day. That's normally fairly low liquidity to support options trading, but HAIN is a pleasant surprise.

Open interest in April options is running mainly at three figures. Front-month at-the-money calls have a bid/ask spread of 6.5%, quite low for a stock with average volume under a million.

In the following analysis I use "68.2%" in a couple of places. In statistics, one standard deviation has boundaries that encompass 68.2% of trades or opinions or whatever is being studied. It's a measure of confidence that future items will fall within those boundaries.

Options are pricing in confidence that 68.2% of trades over the next month will fall between $55.45 and $66.11, for a potential gain or loss of 8.8%, and between $58.22 and $63.34 over the next week.

The trading pace in options early in the trading day was above the five-day average volume. However, an hour into the day, trading has dropped to 5% below average volume for calls, and 12% below average for puts.

The fair-price zone on today's 30-minute chart ranges from $60.51 to $60.99, encompassing 68.2% of transactions surrounding the most-traded price, $60.90. The price opened above the zone this morning but in an hour has dropped below the zone.

This suggests that the bullish momentum that began the day has started to fade.

Hain Celestial Group next publishes earnings on April 29.

Decision for my account: I've opened a bull position on HAIN, structuring it as a vertical credit spread expiring in April, short the $60 put and long the $55 put. The position is profitable at expiration down to $58.73, giving me a 2.8% cushion in case the price falls. The maximum potential yield on the position is 20.3%, with a risk/reward ratio of about 3:1.


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.

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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