Wednesday, May 22, 2013

TSN: Call me chicken...

Tyson Foods Inc. (TSN) sent a bull signal as it continues to climb toward a challenge to its all-time high of $26 set in November 1998. It has approached that level one time before, in June 2007, before pulling back.

TSN's high so far today, $25.65, stands only 1.3% below the peak, so there is very little room for the price to rise before it hits major resistance, if a 15-year-old price level can indeed be termed "resistance" in any meaningful way. Anything happening in the markets in 1998 is the equivalent of ancient Egypt. Love the pyramids, but where's the relevance?

Even so, call me chicken, but the existence of that old resistance level makes me a little nervous.

Nearer term, TSN has been tracing a sideways pattern since March. The bull signal on Tuesday and subsequent trading today carried the price above the pattern's ceiling.

This is TSN's 4th bull signal since the present leg up began from $14.07 last August. Two of the completed signals was profitable, with an average yield of 15.8%, compared to a loss of 2.4% on the one unsuccessful trade. The resulting win/lose yield spread, 13.4%, makes a quite satisfying case for the strength of TSN's upside momentum.

One other symbol, NGLS, survived my first-wave screening last night (see "Wednesday's Prospects"). It was confirmed in today's trading and met my second-wave tests. But it's options lack sufficient open interest for me to trade, and I'm looking for the leverage and hedging ability that options bring to the table.

Tyson Foods, headquartered in Springdale, Arkansas, is the world's second largest processor and marketer of meat products, and the largest based in the United States. In the American mind Tyson is practically a synonym for chicken.

Sales benefit from the trend toward low-carb eating as a way to reduce American obesity. Business is harmed by the movement toward locally grown products raised using traditional methods rather than on chemistry-driven factory farms.

Certainly, analysts are coming down on the optimistic side, collectively giving Tyson a 38% enthusiasm rating.

The financials back that opinion. With return on equity of 11% and debt on the low side at 31% of equity, the numbers argue for steady growth rather than a run-away rocket that ends in a flame-out.

Tyson has been profitable in the last 12 quarters, although less so this year than in 2011 and, in the most recent quarter, than in 2012. The company has surprised to the upside eight times, and to the downside, four.

Institutions own 92% of shares -- a very high level -- and the price is extremely cheap. It takes 27 cents in shares to control a dollar in sales.

TSN on average trades 5.5 million shares a day but, oddly for such a highly liquid stock, has only a tepid selection of option strike prices with open interest in three figures. The front-month at-the-money bid/ask spread on calls is 6.7%.

Implied volatility stands at 22%, about three-quarters down the dix-month range. It has been declining since early April.

Options are pricing in confidence that 68.2% of trades will fall between $23.77 and $26.95 over the next month, for a potential gain or loss of 6.3%, and between $24.59 and $26.13 over the next week.

With 2-1/2 hours to go before the closing bell, puts are running 55% above their five-day average volume, and calls are lagging at 26% of average volume.

The fair-price zone on today's 30-minute chart runs from $25.33 to $25.51, encompassing 68.2% of transactions surrounding the most-traded price, $25.43. The price has traded within the zone nearly all day, with only a few forays beyond its boundaries.

TSN next publishes earnings on Aug. 5. The stock goes ex-dividend in August for a quarterly payout yielding 0.79% annualized at current prices.

Decision for my account: I'm passing on TSN today. I know it's a bit irrational to take 15-year-old price peaks seriously, but it was unsuccessfully challenged six years ago as well. I've put a marker down on that peak and will treat a break above that level as a bull signal, using my normal rules. But I won't open a position in TSN today.


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.

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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