MEI: Auto components bull play

Update 5/1/2013: MEI triggered its stop/loss on May 1 and I've closed the position at $13.55 for a 6.8% loss. The position was structured as long shares. There was no announcement or news to explain the sudden decline, which covered 7% intraday from the high to low. There had been some chat in mid-April that hedge funds were losing interest in MEI. The price hit a higher high on April 30, the day before the stop/loss was hit, meaning that the symbol remains, technically, in an uptrend.

Under my rules, the initial stop/loss is set at double the average daily trading range from the entry price. Later, the closing signal is changed to the 10-day price channel boundary opposite the direction of trade. It's the initial, trading-range based stop/loss that MEI triggered.

Methode Electronics Inc. (MEI) broke above its 20-day price channel on Wednesday and confirmed the bull signal the next day by trading beyond the breakout level, $13.94.

MEI has been in an uptrend from May 2012, beginning from $6.94 and continuing, with two corrections, up to Thursday's high of $14.95.

This is the stock's fourth break above its 20-day price channel. Of the three completed trades, two produced a profit, averaging 21.6%, and one was unsuccessful, for a loss of 4%. Adjusting the winning yield by the ssuccess rate produces a score of 14.4%, well above my 5% minimum. The spread between the loss and the average gain is 17.6%, which is quite wide.

MEI has completed 14 bull signals since January 2009, when the broad markets began recovering from the post-recession crash. Eight of those were successful, for an average yield of 18.4%, and six were failures, for an average loss of 8%. The winning yield adjusted for the success rate is 10.5%, and the win/fail yield spread is 10.3%.

The most recent leg up began Feb. 4 from $9.63. A three-day push carried the price up to $12.23. Beginning March 6 the price settled into a sideways pattern with a ceiling of $14.02 and a floor of  $12.48. The current breakout is the first move beyond the ceiling.

Methode Electronics, headquartered in Chicago, Illinois,  is one of those behind-the-scenes companies that makes components used by other companies to make consumer products. It's niches are radio remote controls, electronics, wireless and sensing technologies for the auto industry.

MEI is a stealth stock; it is barely followed by analysts and so lacks the price shocks brought to the table by a pack of analytical minds.

Financially, it is of the slow-and-steady variety, with return on equity of 7% and long-term debt amounting to only 14% of equity.

The spring quarter tends to be the top earner, and spring earnings in 2011 were far below 2010 (no surprise, given the recession), and 2012 was way below 2011 (more surprising, given the recovery).

One of the last 12 quarters produced a loss, and that was back in 2011. Seven of the 12 quarters produced earnings surprises to the upside, and four to the downside.

Institutions own 92% of shares, and the price is at sales parity; it takes $1.04 in shares to control a dollar in sales.

MEI on average trades 214,000 shares a day. It supports a moderately OK options grid, but the spotty double- and single-digit open interest is too sparse for my taste.

The fair-price zone on today's 30-minute chart ranges from $14.04 to $14.64, encompassing 68.2% of transactions surrounding the most-traded price, $14.44. The price quickly moved up into the zone in the first half-hour of trading, and except for one brief essay to the upside, it has remained zone-bound in the first two hours of trading.

Methode Electronics next publishes earnings on June 24. It goes ex-dividend in July for a quarterly payout yielding 1.92% annualized at today's prices.

Decision for my account: I've opened a bull position in MEI, structuring it as long shares.

References

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

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.