Wednesday, March 13, 2013

IRBT: Robotic recovery?

Update 4/15/2013: IRBT today crossed below the lower boundary, $24.45, of its 10-day price channel, giving an exit signal for my bull position, which was constructed out of long shares.

The downward momentum was quite strong, with the intra-day range running 40% above the average for the past 20 days.

Sharp moves often see minor bounces, and so I delayed the exit to see if there would be a  very near term upward retracement to mitigate the loss.

And indeed there was. The price gave a brief upward spike seven minutes before the market close, and I was able to exit for a 1 cent profit, which is 0.06%. Essentially, a wash.

Not a good outcome, but one where a trader can slowly nod and drawl, "Could'a been worse."

iRobot Corp. (IRBT) is a well-worn story: A tech start-up takes off and the markets are enthralled and then slows, and the markets lose interest.

IRBT on Tuesday broke above its 20- and 55-day price channels on Tuesday, raising the possibility (although far from the certainty) that traders are again gaining interest.

The stock today is trading above the $24 breakout level, confirming the bull signal.

The stock hit a post-recession peak of $29 in late April 2011, followed by a choppy decline down to $16.25 in November 2012.

The ensuing stair-step upward has yet to set  a higher high on the weekly chart and so doesn't yet count as a mid-term uptrend. A break above $26.17 would allow for an argument that an uptrend is in place.

IRBT has broken out to the upside 15 times since the broad markets began their post-recession recovery in early 2009. Nine were profitable, for an average yield of 14.6%.

Adjusting the 60% success rate by the yield produces a score of 8.8%, well above the 5% minimum score I like to see in a trade.

The current decline began in earnest in early February of last year. Since then there have been two upside breakouts, one of which was profitable, with a 5.5% yield.

iRobot, headquartered in Bedford, Massachussetts, makes a wide range of mobile robots for uses ranging from vacuuming floors and cleaning pools in the home to supporting law enforcement and the military in the field and in battle.

Analyst opinion reflects the fact that market interest in iRobot flagged after its initial "Wow!" concept days. It isn't widely followed, and the less than a handful of analysts that do follow the stock give it a negative 67% enthusiasm index.

In part, it's a game of over-expectation. iRobot has a respectable return on equity of 6% in the most recent quarter, about half that of the quarter before. That's not growth stock territory but is far from being a financial horror. And it is achieving those returns with no long-term debt.

Earnings faltered in the last quarter of 2011, hitting a low in 2011Q1. They then staged a strong recovery for two quarters before crashing for a loss in the 4th quarter of 2013.

So the bad news is: Loss. The good news is: Room for recovery.

The most recent quarters loss was the only negative earnings report of the last 12 quarters, and all quarters have shown upside surprises, even the loser.

Institutions own 65% of shares, and the price has not been bid up a lot. It takes $1.53 in shares to control a dollar in sales.

IRBT on average trades 491,000 shares a day. It has a sparse options grid with front-month open interest running to three- and two-figures near the money.

The front-month at-the-money bid/ask spread on calls is 11%.

There's not much I can do with this options grid in terms of setting up vertical spreads or other complex option constructions. So with IRBT, its shares or nothing.

The options, however, can help in my volatility analysis, which uses the statistical concept of one standard deviation, boundaries that encompass 68.2% of trades surrounding a reference price.

Options are pricing in confidence that 68.2% of IRBT trades will fall between $21.86 and $26.16 over the next month, for a potential gain or loss of 8.9%, and between $22.98 and $25.04 over the next week.

Options trading is far from active. Call volume is running at just 10% of the five-day average, and puts at 24% of the average.

This suggests that the breakout was a one-day wonder, and certainly the price on Tuesday opened at $25.10 and then fell to $23.93, below the beakout level, by the close. In trading today, the price has flirted with the breakout level, moving below and then return above as I did my analysis.

The fair-price zone on today's 30-minute chart runs from $23.76 to $24.08, encompassing 68.2% of transactions surrounding the most-traded price, $23.98. After a strong rise in the first half hour of trading, IRBT has stayed within the zone but, for the most part, above the most-traded price.

iRobot next publishes earnings on April 23.

Decision for my account: The chart and odds are good enough to work under my preferences. I've opened a bull position structured as long shares.


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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