Tuesday, September 10, 2013

NUS: Bull play on direct marketing

Update 1/15/2014: NUS broke below its 20-day price channel today, signalling an end to the series of bullish positions in the stock. It was on the Roll List at the time of the signal rather than being an active position.

I held positoins in NUS twice in this series, from Sept. 10, 2013 to Sept. 27, 2013, and from Nov. 5, 2013 to Dec. 13, 2013.

During 28 days as an active position, NUS rose by 5.3%, or 70.4% annualized. I structured my positions as bull put spreads, sold for credit. The options spreads produced a 15.5% yield on risk, or 205.8% annualized.

The chart shows a clear end to the rise from Dec. 24, 2012 to Jan. 13 of this year and the high momentum of the drop. I've leveled the {+5} degree as N because I have no idea what the number or letter is. Whatever, clearly wave N {+5} has reached an end.
NUS 2 years daily bars


Nu Skin Enterprises Inc. (NUS) broke above its 20-day price channel on Monday and confirmed the bull signal today by rising further, hitting a high (so far) of $95.39.

The upward push appears, under Elliott wave analysis, to be part of fifth wave, culminating an uptrend that began from $32.36 on Dec. 24, 2012.
NUS 1 year daily bars

The sideways trend immediately prior to the present four-day rise is problematic (and I've labelled it as such in the chart). By magnitude it looks like a correction of the same magnitude of the other waves I'm counting.

If it is such a correction, it shouldn't be where it is, unless I've put the culminating of the third wave and the ensuing fourth wave in the wrong positions. If I've done that, then NUS is still in a third wave and the upside potential is still quite large.

That's a lot of "ifs", but I find that that's a characteristic of Elliott wave analysis. Ifs abound.

This is the stock's third price-channel breakout to the upside since the present uptrend began in December. The two completed bull signals were both profitable, on average yielding 30.6% over 42 days.

Nu Skin Enterprises, headquartered in Provo, Utah, does direct sales of personal care products and dietary products. It's model is what is called multi-level marketing. Sales people recruit other sales people, who in turn recruit others down the chain. Each sales person is compensated both for his or her own sales, and those of those recruited.

Analysts are wildly optimistic about Nu Skin's prospects, collectively giving it a 75% enthusiasm rating.

The company reports 40% return on equity with very low debt, amounting to 19% of equity. This is growth-stock territory.

Looking at the last 12 quarters, the company has been profitable in each, and profits have consistently grown year over year. The company has produced upside earnings surprises in all 12 quarters.

Institutions own 79% of shares, and the price has been bid up. It takes $2.32 in shares to control a dollar in sales.

NUS on average trades 871,000 shares a day, sufficient to support a moderate selection of option strike prices with three-figure open interest and a few two-digit strikes interspersed. The lower open interest strikes might make it difficult to construct a spread -- we shall see.

The front-month at-the-money bid/ask spread on calls is low for this level of liquidity, at 3.9%.

Implied volatility is running at 45% and has been rising since mid-August.

Options are pricing in confidence that 68.2% of trades will fall between $82.16 and $106.40 over the next month, for a potential gain or loss of 12.9%, and between $88.46 and $100.10 over the next week.

Trading in options is quite active today, with both puts and calls running at more than double their five-day average volume.

The fair-price zone on today's 30-minute chart runs from $94.26 to $95.02, encompassing 68.2% of transactions surrounding the most-traded price, $94.76. NUS opened at the zone floor, rose to the ceiling and has since fallen back to the floor.

Nu Skin Enterprises next publishes earnings on Oct. 28. The stock goes ex-dividend in November for a quarterly payout yielding 1.27% annualized at today's prices.

Decision for my account: I've opened a bull position in NUS, structuring it as a vertical options spread sold for credit and expiring in October, short the $90 put and long the $85 put. The short put had only double-digit open interest, lower than the triple-digit my preferences require, but I got a decent fill on the order.

Leverage on the position is 1.9:1, with maximum yield on risk at expiration of 21.9%. The position provides a hedge of profitability at expiration down to 5.9% below the entry price.

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.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

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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