Tuesday, December 31, 2013

KAR: Bullish on car auctions

Update 3/26/2014: I've closed my bull position in KAR after it gave an exit signal. The decline from the March 7 peak of $32.24 means that wave 3 {-1}, which began Feb. 18, is complete, and a portion of the rise from $27.05 is being corrected. Up one degree, wave 5 to the upside is still underway.

I could have chosen to ride out the wave 4 {-1} correction, but chose, perhaps in an excess of caution, to exit instead.

Click on chart to enlarge.
KAR 9 months daily bars

Update 2/27/2014: I've opened a bull position in KAR, structured as long shares. Since I exited in January KAR has completed wave 2 {-1} to the downside and advanced along wave 3 {-1} within wave 5.

Click on chart to enlarge.
KAR 90 days 4-hour bars

Update 1/13/2014: KAR took a nasty U-turn the day after I entered. It dropped below the lower boundary of the 10-day price channel today. 

By the Elliott wave count, KAR has completed wave 5 {-2} to the upside, peaking at $30.46, which also brings fifth waves of two higher degrees to an end.

KAR is now correcting the rise that began March 7 from $19.06.

Click on chart to enlarge.
KAR 20 days 15-minute chart
The company on Jan. 9 put out a news release saying that the CEO of a subisidiary was leaving, and so perhaps that provided a rationale for bulls to exit.

I've closed my position for a loss. With that sort of Elliott analysis, there's no profit in hanging on to a bull position.

My KAR position lost 3.7% over 11 days, or 123.3% annualized.

Update 1/2/2014: I've opened a bull position in KAR, structuring it as long shares. The stock is up from the prior close, up intraday and rising slightly in the last two hours of trading.

I had put KAR on the Watchlist after my initial analysis because of slow holiday trading.

KAR Auction Services Inc. (KAR) is within the final stages of an uptrend that began Oct. 4, 2011 from $10.92. That kick-off point was in line with the market as a whole.

While many major companies have seen their stocks peak and move into a downtrend, KAR continues to rise and broke above its 20-day high of $29.22 on Monday, confirming the bull signal in trading today.

The Chart

By the Elliott wave count, KAR is in wave 5 of a larger degree wave 3 {+1}, which is in turn wave 3 {+2} within wave 3 {+3}.

So the uptrend is pushing toward the end of a rise from $27 on Dec. 6 -- the start of wave 5 -- but the higher degrees suggest that KAR has much more upside potential ahead of it.

Click on chart to enlarge.
KAR 3 years 2-day bars (left), 90 days 2-hour bars (right)
KAR's climb from 2011 would be what some Elliott wave analysts would call an extended fifth. In terms of counting technique, it results from the necessity to keep the third wave from being shorter than both the first and fifth waves -- a primary rule within Elliott.

When the straightforward count produces a short third wave, the proper counting technique is to drop down a degree and count that short third as the first wave of the lesser degree. So what some analysts call an "extended" wave, I call "keep on rolling" -- its all waves up and down, and the proper use of degrees keeps the system from breaking.

Wave 5 must exceed the wave 3 end point of $30.32 set on Oct. 22. That gives KAR 3.2% worth of upside potential within the mid-term count.

Bigger picture, the end of wave 5 will be followed by a correction of the rise from $19.06 on March 7, the start of wave 3 {+1} and will in turn be followed by rises and corrections of the waves of higher degree: 3 {+2} from $17 beginning Oct. 13, 2012 and 3 {+3} from $14.10 beginning Aug. 7, 2012.

This is KAR's fourth bull signal since wave 3 {+1} began last March. The three completed signals on average yielded 8.3% over 40  days. It is the first bull signal since wave 5 began on Dec. 6.

The Company

KAR Auction Services, headquartered in Carmel, Indiana, provides a marketplace for auctioning cars and other vehicles. Vehicle auctions are mainly restricted to dealers and wholesales in the United States, although they are a booming consumer market in some other countries.

In 2011 KAR Auctions handled the sale of more than three million vehicles through more than 200 locations. The company also provides other servides, such as inspections, storage, transporation, reconditioning and titling.

KAR Auction's business is intimately linked to the economy and its recovery from the recent recession. Hard times meant people kept their cars longer, were more likely to buy used, and created more junkers by stretching out the lifespan of their vehicles. Recovery means more people will buy new, putting more used cars on the market.

Analysts are universally optimistic about KAR Auction's prospects, collectively coming down with a 100% enthusiasm rating.

The company reports return on equity of 10%, with high debt amounting to 119% of equity.

Earnings tend to be highest in the spring and summer quarters, and KAR Auction's most recent earnings in those quarters have topped their counterparts of a year earlier. Earnings have surprised to the downside seven times in the past three years, and to the upside five times.

The company's earnings yield is 2.6%, lower than 90% of other companies in the specialty retail industry. The quarterly dividend, yielding 3.4% annualized at today's prices, is higher than the earnings yield by 29.7%.

KAR Auctions next publishes earnings on Feb. 17. The stock goes ex-dividend in March for a 25 cent payout.

Institutions own 78% of shares, which are priced at 38 times earnings, a fairly high premium. The price is also above par when compared to sales. It takes $1.96 in shares to control a dollar in sales.

Liquidity and Volatility

KAR on average trades 1.3 million shares a day and supports a small selection of options strike prices spaced $2.50 apart near the money. Open interest is very low and spotty, in the double digits where it exists.

Implied volatility stands at 23% and has been ranging sideways since June.

KAR's options showed extreme volatility in April and May, meaning that today's volatility ranks as extremely low, in the 4th percentile. Excluding the outliers, the percentile is in the mid-range, at 41%.

Options are pricing in confidence that 68.2% of trades will fall between $27.56 and $31.44 over the next month, for a potential gain or loss of 6.6%, and between $28.57 and $30.43 over the next week.

Contracts are trading actively, with calls running at more than twice their five-day average volume and puts at 25% above the average.

Decision for my account: I intend to open a bull position in KAR, structuring it as long shares. I won't take the trade today because of the early market close for the holiday, but will open a position if upside momentum continues into the last half hour before Thursday's closing bell.


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

I use the number 68.2% in using applied volatility to calculate the expected trading range. 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. The principal practitioner 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

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

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.

No comments:

Post a Comment