MEAS: A low-volume bull trade

Update 5/22/2013: MEAS broke below its 10-day price channel on May 22 at $44, signalling a close to my bull position. I sold within a half hour of the signal because the position was in shares and showed little sign of reversing. Had it been hedged in option spreads, I would have played for a more strategic exit.

The exit provided a 10.8% profit from the initial entry. I added to the position three times during its lifetime, and the profit from the total basis was $8.2%.

Measurement Specialties Inc. (MEAS) broke above its 20-day price channel on Tuesday, creating a bull signal that was confirmed Wednesday (today) by the stock trading above the channel boundary, $39.58.

The upside breakout comes amid a shallow renewal of a long-running uptrend following a correction in  late 2011 down to $23.55.

Of the three possibilies I looked at today, MEAS also had the strongest very near term uptrend, beginning Nov. 14, 2012 from $26.77. (The other symbols are IBN and HDB.)

MEAS has had six bull signals since the present trend began in 2011, half successful and half not. The winners had an average yield of 8.2%. The losing trades had an average loss of 6.2%, giving the winners a slight, 2% advantage.

Since early 2009, when the recovery from the post-recession crash began, MEAS has had 15 breakouts, eight of them winners, with an average yield of 31.3%. That gives it a yield advantage of 23.7% over the losing trades.

Measurement Specialties, headquartered in Hampton, Virginia, produces a wide range of sensors and measuring devices used by the military, the aerospace industry, medicine, engines and vehicles, environmental monitoring and consumer goods, among others.

It's followed by less than a handful of analysts, so I can't reasonably score their opinions. Return on equity is 13.4%, which is quite good. Debt is running at 39% of equity, higher than I like but far from crippling.

The company has been profitable for at least the last 12 quarters, but without a trend. The 4th quarter tends to be  the peak, and it has held steady the past two years after a huge gain over the third year back.

Institutions own 88% of shares, and the price has been bid up somewhat. It takes $1.80 in shares to control a dollar in sales.

MEAS on average trades 33,000 shares a day. It has a small selection of options strike prices, but the open interest is mainly none. So I can trade the company only as long shares, which means I forego leverage and hedging.

But I always leave some room in my holdings for the small fry. Size doesn't always matter.

Although average volume is low, the stock bid/ask spread is reasonable, at 0.3%

Implied volatility is running at 62%, near the top of the six-month range. It took a huge leap from 20% on April 12.

In the ensuing discussion I use the term "68.2%" in a couple of places. It's from statistics and represents one standard deviation, the boundaries that are expected to contain 68.2% of whatever is being studied.

Options are pricing in confidence that 68.2% of trades over the next year will fall between $32.31 and $46.67, for a potential gain or loss of 18.2%, and between $36.04 and $42.94 over the next week.

The fair-price zone runs from $39.33 to $39.72, encompassing 68.2% of transactions surrounding the most-traded price, $39.56. The stock has mainly traded within the zone, with occasional short-lived breakouts to the upside or the downside.

MEAS next publishes earnings on June 3.

Decision for my account: The price is flirting with the breakout level, sometimes a bit below and sometimes above, in line with the broad market. It technically has met my rules for confirmation, but in a fairly slipshod fashion. But I like the chart, the odds and the financials. I've opened a bull position structured as long shares.

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.