Norfolk Southern Corp. (NSC) renewed its rise in an uptrend that began last November from $56.49, breaking above its 20-day price channel at $78.79 and pushing to today's high (so far) of $79.34. This is the second up week for the stock following a five-week sideways correction.
This is NSC's second bull signal since the uptrend began. The first yielded 19.9% over 80 days. Since the markets began their post-recession recovery in early 2009, NSC has completed 18 bull signals and was profitable in only eight, for only a 44% success rate and a very narrow win/lose yield spread of 1.6%.
It's a classic conundrum when dealing with the odds: Look at the nearer term with less data, or look at the longer term with more data, much of which is out of date and smells like moldy Roquefort cheese. Much as I love Roquefort, I'll stick with the newer data, at least for the sake of keeping the analytical ball rolling.
Norfolk Southern, based in Norfolk, Virginia, is a major rail player in eastern North America, operating over routes spanning 20,000 miles in 22 U.S. states, the District of Columbia and Ontario.
A bit less than half of its value is evenly split between intermodal freight (think containers) and coal haulage), with chemicals and farm products also playing important roles.
Norfolk Southern's CEO was sounding optimistic notes at the shareholder meeting this week: “I often tell people that we are running better on a sustained basis than I have ever seen in my career.”
The blogosphere, however, as is often the case, stuck to the low notes, with Motley Fool declaring NSC as an underperforming company whose management is blind to its problems.
Analyst enthusiasm comes in at goose eggs, with positive and "Meh!" assessments balancing each other perfectly.
Analytical opinion plays no role in my final trading decisions. I'm a numbers guy, first and foremost, and my numbers are on the charts. But I like to at least be aware when strong opinions are coming into play because they, inevitably, have some influence on how I view the numbers: Cup half full or half empty?
The financials numbers are on the full cup side, and by more than half. Norfolk Southern reports reutrn on equity of 18%. Long-term debt is running at 83% of equity, higher than I like.
The company has been profitable in each of the last 12 quarters. The peak quarter in 2011 exceeded its 2010 counterpart, and 2012 did the same compared to 2011. So while there is no quarter by quarter trend in earnings, case can be made that the big-picture direction is up.
All but one of the quarters produced an upside earnings surprise. The one outlier was a downside surprise.
Institutions own 615 of shares and the price has been bid up in a manner that belies the negativity surrounding coverage of this company. It takes $2.27 in shares to control a dollar in sales. Those numbers to me indicate a fair degree of upside sentiment has led traders to bid up the price.
NSC on average trades 1.9 million shares a day and supports a moderately wide selection of option strike prices, with open interest running to four and five figures. The front-month at-the-money bid/ask spread on calls is low, at 3.6%.
Implied volatility stands at 20% and has been declining since mid-April.
Options are pricing in confidence that 68.2% of trades will fall between $74.27 and $83.47 over the next month, for a potential gain or loss of 5.8%, and between $76.66 and $81.08 over the next week. Such low volatility often makes it difficult to construct a position with sufficient yield.
Trading is very active today in puts, with volume running two and a half times the five-day average. Calls are running at only a third of the average.
The fair-price zone on today's 30-minute chart runs from $78.94 to $79.30, encompassing 68.2% of transactions surrounding the most-traded price, $78.99. NSC traded above the most-traded price the first 2-1/2 hours of trading, and at that level since then. The pattern is one of a breakout running out of steam in the very short term.
Norfolk Southern next publishes earnings on July 22. The stock goes ex-dividend in early August, most likely, for a quarterly payout yielding 2.54% annualized at current prices.
Decision for my account: Despite the negative analytical opinion, I don't find anything to dislike in this stock. Good chart, good financials. The odds have some limitations, as I noted above, but they aren't a deal killer.
I've opened a bull position in NSC, structuring it as vertical credit option spreads expiring in June, short the $77.5 put and long the $75 put. The position has a potential maximum yield at expiration of 19.6%. The spreads provide a 2.8% cushion of profitability at expiration below the entry price.
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.
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