Monday, March 11, 2013

NWL: Bull breakout, but volatility is a problem

Newell Rubbermaid Inc. (NWL) broke above its 20- and 55-day price channels on Friday, continuing  an uptrend that began in August 2012.

The price on Monday followed through on Friday's beakout above the $24.51 channel boundary, rising to a high of $25.21 (so far). There is major resistance from the pre-recession era, 2007, ranging from $29.50 to $32.19, although I would question whether resistance that old has much meaning.

NWL, like most stocks, has been rising for a long time. So the breakouts that send bull signals mark stages in an ongoing trend rather than trend reversals.

In a perfect world, I would be jumping aboard new trends and riding them to the heights. In the world as it actually is, these days, the choice is largely to engage in an existing trend or not trade at all.

NWL has sent 15 bull signals since the broad markets began their post-recession recoveries in early 2009. Ten of those were profitable, with an average return of 14%.

Adjusting the yield by the success rate produces a high score, 9.3%, nearly double my minimum preference of 5%.

The stock has had three upside breakouts since the present leg up began last August, and all of them were profitable, for an average yield of 3.8%.

So the odds suggest that although NWL continues to have a strong uptrend, its best days lie in the past.

Newell Rubbermaid, headquartered in Atlanta, Georgia, makes a variety household products, generally involving plastics of some sort. Full disclosure: They made the ugly yet utilitiarian bookshelves in my basement that hold my extensive book collection.

Analysts have high expectations for future growth, collectively coming down with a 55% enthusiasm rating.

The financials support that opinion. Newell Rubbermaid reports a 25% return on equity. Debit is on the high side, however, at 85% of equity.

The company has been profitable for at lest the past 12 quarters. Profits have been steady, rather than accelerating. The peak spring quarter, when the handyman's heart turns to thoughts of Rubbermaid products, was down slightly in 2012 compared to two years earlier.

Each quarter has produced an upside earnings surprise.

Institutions own 89% of shares and the price is relatively cheap; it takes $1.21 in shares to control a dollar in sales.

NWL on average trades 3.2 million shares a day, sufficient to support a moderately good selection of option strike prices. Open interest runs to the three- and four-figures yet is "clumpy": Front-month puts have open interest of only two contracts at the money and yet 1,775 contracts two strikes up on the grid. This is unusual for a liquid stock.

Open interest is running at 22%, slightly below the six-month range. It has been zig-zagging downward since late February, and the most recent move was up to a lower high. The front-month at-the-money bid/ask spread is high, at 13%.

In the ensuing discussion I use the concept of a standard deviation, a statistical tool that defines boundaries encompassing 68.2% of trades surrounding a base price.

Options are pricing in confidence the 68.2% of trades will fall between 23.50 and 26.72 over the next month, for a potential gain or loss of 6.4%, and between $24.34 and $25.88 over the next week.

Options trading is on the slow side, with call volume at 41% of the five-day average and put volume and puts at 62%. These numbers suggest that there's little speculation in the stock, and what speculation their is leans to the bear side.

The fair-price zone on today's 30-minute chart, encompassing 68.2% of transactions surrounding the most-traded price, $25.09, runs from $25.03 to $25.16. NWL is trading at the upper boundary with 3-1/2 left before the market close.

Newell Rubbermaid next publishes earnings on April 22. The stock goes ex-dividend in May for a quarterly payout yielding 2.4% annualized at current prices.

Decision for my account: I'm passing on NWL because of difficulties in constructing a decent options position. I mentioned above "clumping" of open interest in the front month. In order to build a bull put spread for the initial position, I would need to move into options with no or very low open interest.

Moreover, the stock's volatility is on the low side. That means, in order to get decent return on a short vertical spread, I would need to accept a high risk/return ratio, something in the neighborhood of 10:1. I'm unwilling to do that.

Third, I generally dislike double-digit bid/ask spreads, such as the 13% for NWL.

I could buy stock instead, but that means giving up leverage, and the dividend yield is insufficient to make that a reasonable trade-off.


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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