Rock-Tenn Co. (RKT) broke above its 20- and 55-day price channels, sending a bull signal amid a long-running uptrend that whose most recent leg up, following a major correction, began in November 2012 from $61.26. It has since risen 76% to an all-time high (so far) today of $108.
The immediate question to be asked about such a trend is whether the stock has risen too far to trade. Did the train leave the station long ago, leaving the poor trader stranded on an empty platform?
The problem with such perfect hindsight is that the question could have been posed almost any day since the post-recession rise began in March 2009, and in only four periods would the answer have been yes. In perfect hindsight, of course.
So in my analysis, as a good trader must, I shall focus mainly on the now, with only enough of the then to bring context and understanding.
This is RKT's third bull signal since the present leg up began. The two completed signals averaged a profit of 19.5% over a lifespan of 54 days. Annualized, the return was 132%.
RKT was one of five symbols, all breaking out to the upside, that survived my initial screening. (See "Monday's Prospects" posted over the weekend.)
In my second-wave screening, I rejected TWC and AFSI because they had no profitable bull signals within their present trend. RES had 10 bull signals, but nine of them failed. AIRM is trying to claw its way up after revised earnings estimates prompted a downside gap. It's not a promising chart for an bull trade.
That left RKT as the sole survivor.
Rock-Tenn Co., headquartered in Norcross, Ga., is a paper and packaging maker with more than 245 facilities in North and South America and in China. Its products including folding cartons, corrugating packaging, automated packaging systems, merchandising displays and a thick kind of paper called "paperboard".
If the economy is picking up, then more things will need to be shipped, and that requires packaging. So Rock-Tenn is poised to benefit from a recovery in a wide range of manufacturing and retail sectors.
Analysts have a favorable view of RKT's prospects, collectively coming down with a 50% enthusiasm rating.
The company's financials have an element of the slow and steady. Return on equity is 10%, and long-term debt is somewhat higher than I like, standing at 82% of equity.
Looking at the last 11 quarters, I find the company has been profitable in each, with earnings tending to peak in the 4th quarter, which shows no trend. Earnings surprised eight times to the upside and thrice to the downside.
Institutions own 87% of common stock, which are priced below sales parity. It takes 82 cents in shares to control a dollar in sales.
RKT on average trades 695,000 shares a day and has an adequate selection of option strike prices. However, open interest tends to the double digits at the strikes I would use to constructed a hedged and leveraged position, too illiquid for my taste. So any trade I make in RKT will be in the form of long shares.
The front-month at-the-money calls have a bid/ask spread of 4.4%.
Options are pricing in confidence that 68.2% of trades will fall between $98.48 and $115.68 over the next month, for a potential gain or loss of 8%, and between $102.95 and $111.21 over the next week.
Options of both sorts are trading at an extrading pace, especially calls, whose volume is running at nearly nine times the five-day average. Puts are running at a bit more than double the average volume.
The fair-price zone runs from $106.59 to $107.49, encompassing 68.2% of transactions surrounding the most-traded price, $107.14. RKT began the day above the zone and then fell for two hours to the bottom of the range. It has since recovered but with three hours before the closing bell remains below the most-traded price.
Rock-Tenn next publishes earnings on July 22. It goes ex-dividend in August for a quarterly payout yielding 1.12% annualized at current prices.
Decision for my account: I've opened a bull position in RKT, structuring it as long shares.
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.