Monday, December 9, 2013

THO: Happy headlines, sad chart

The headlines surrounding Thor Industries Inc. (THO) are positively giddy:
  • Thor Industries' Q1 Miss Comes Despite Hot RV Demand
  • Thor Industries: On The Road Higher
  • Thor Industries: Major Player in Rebounding and Underanalyzed Industry
In other words, bad news is  trivial in the face of the "Hot", the road is rising, if analysts aren't bullish on Thor it's because they aren't looking, may the Force be with you and the odds ever in your favor.

Even Zacks is on board, giving it a "Buy" rating.

When I'm faced with such a high degree of optimism, my instincts shout, "Look at the chart".

Thor's chart tells me that the rosy scenario may well play out but not right away. Here's why.

Click on chart to expand.
THO 3 years 2-day bars (left), 90 days 1-hour bars (right)
By my Elliott wave count, THO began a correction from its Oct. 22 peak and is now tracing out the five waves within wave A, a part of the downtrending wave 4 {+1}. 

Elliott wave doctrine says that the A wave will be followed by an upward correction and then a downward C-wave slide that can be of sufficient severity to cause dogs to howl and grown men to weep.

That's the bad news, the "not right away".

The good news is that the correction is happening within an uptrending third wave that began Aug. 9, 2011. Once the wave 4 {+1} correction is complete, wave 5 {+1} will carry THO back above the Oct. 22 peak, $59.94.

And in fact the present rise, wave 2 {-1} could come near to $59.94 before reversing. However, I'm reluctant to place a bet on a 2nd wave correction to the upside. Wave 2 {-1} has already retraced 68.2% of the decline, and that is often corrections where corrections end.

Thor, headquartered in Elkhart, Indiana, makes recreation vehicles. The story is that with the recession over and the recovery taking hold, happy, optimistic consumers will pile into their brand news RVs and hit the road in search of fun and adventure.
Fewer than a handful of analysts follow Thor -- the "Underanalyzed" part of the headline above was correct -- but those that do are mainly positive about the company's prospects.

Thor's financials are glowing -- return on equity of 18% with no long-term debt.

Earnings tend to peak in the summer quarter, and the company has seen earnings steadily rise each summer year over year.

The company's earnings yield is 5.1%, higher than 66% of other mobile home and RV companies. Shares cost 20 times earnings but are priced at a discount to sales: It takes 93 cents in shares to control a dollar in sales.

Thor's earnings have surprised to the upside five times in the last three years, and to the downside six times, the most recent quarter being the latest downside surprise.

Institutions own 83% of shares.

THO on average trades 400,000 shares a day and supports a moderate selection of option strike prices, all but one with open interest below three figures. The options are too illiquid to meet my criteria for trading although they have a reasonable front-month at-the-money bid/ask spread of 8.5% on calls.

Implied volatility stands at 32% and has been stairstepping higher from the one-month low on Dec. 3. Volatility now stands at the 26th percentile, meaning that it is low. This implies that long positions, such as bull call spreads or long options or shares, will provide the best results.

Options are pricing in confidence that 68.2% of trades will fall between $49.94 and $60.10 over the next month, for a potential gain or loss of 9.2%, and between $52.59 and $57.46 over the next week.

Contracts are trading lackadaisically and are heavily skewed toward calls, which are running at 46% of their five-day average volume, compared to 9% of average for puts.

Thor next publishes earnings in January. The stock goes ex-dividend in January for a quarterly payout yielding 1.62% annualized at today's prices. The company is retaining 68% of earnings.

Decision for my account: I won't be opening a bull position in THO. The chart is too bearish to justify the risk. A downside breakout of wave 3 {-1} would be a decent bear play if THO's options were more liquid. But they aren't, leaving me with the need to wait until wave 4 {+1} is complete and entering on wave 5 {+1}.


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.

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