Wednesday, April 23, 2014

FC: Bullish on effectiveness

Update 6/23/2014: FC closed below the 10-day price channel on June 22 and confirmed the signal the next day. I've removed FC from the Roll Shelf. The position, structured as long shares, lost -2.7% over 19 days, or -51.9% annualized.

Update 6/18/2014: FC closed below its stop/loss level on June 17 and confirmed the exit signal the next day. The symbol will go on the Roll List until it closes and confirms below the 10-day price channel. Otherwise, it will be eligible for re-entry under my roll rules.

My practice is to defer calculation of profit or loss until the symbol is no longer eligible to be rolled forward.

In terms of the Elliott wave analysis:

The bearish analysis goes like this. The peak of $22.75 on June 6, which marked the reversal point into the present decline, can be seen as the conclusion of wave 3 {+2}, which began Nov. 2, 2009. The present decline,  by the count, can be seen as the beginning of a correction that will take back a portion of the rise from $4.76, a significant decline indeed.

Click on chart to enlarge.
FC 8 months daily bars
Alternately, there is a bullish analysis. The decline could be a move of lower degree that signifies yet another 5th-wave extension in a stock that is prone to such patterns.

At any rate, my exit rules have quite properly gotten me out of the position for a small loss, and if the bullish count proves to be correct, then it will get me back in when the price again closes above the 20-day price channel and confirms the breakout.

The peak at $22.50 on March 4 is the numb of the problem. It can't be the end of wave 5 {-1}, which cascades up to wave 3 {+2}, because of the higher high set on June 6.

If it is instead a subdivision, wave 1 {-1} within wave 5 {-1}, then the wave 3 {-1} rise implies a long 5th wave after a brief correction because if the 3rd wave is shorter than the 1st, then the 5th wave must be the longest of all. Since is a fundamental rule of Elliott wave analysis.

I've marked that alternate count in red.

\Another possible count wold see the March 4 peak as the end of wave 3 {+2}, and the ensuing high on June 6 as simply an overshoot within a Flat, the Elliott term for a sideways correction.

I've chosen the bearish count as my primary analysis because the roll series is bullish, and therefore a decline is the most harmful outcome. In trading, I've found, it pays to give greater credence to the worst case scenario.

Update 5/30/2014: FC regained its upward momentum and I've opened a bull position under my shorter-term rules, structured as long shares.

Update 4/23/2014: FC failed to show upside momentum near the closing bell and I've decided not to take the trade today. I've added FC to my Watchlist for future consideration as a bull play.

The rules are these: A close above the current 20-day price channel triggers a potential entry signal, which must be confirmed by FC closing above that signal level the next day. A close below the 10-day price channel would trigger removal from the Watchlist.

Franklin Covey Co. (FC), in breaking above its 20-day price channel on Tuesday, continued a strong uptrend that has nearly quadrupled the price since September 2011.

FC has shown a bullish face for more than two years, but a detailed look at the chart for the past 90 days suggests that the stock is undertaking a correction before pushing on to fresh highs. The correction may, in fact, be over already, but it will take a rise of nearly 5% to confirm that assessment.

The Chart

Elliott wave analysis places FC in the third wave up of a rise that began in 2003 from 65 cents and carried the price to a high last March of $22.50. That high represented the end of the first wave to the upside of a rise that began Feb. 3, 2014 from $17.95.

By my count, that correction ended April 11 at $18.29 and the third wave to the upside has begun. It will carry the price  beyond $22.50 into new territory.

Click on chart to enlarge.
FC 3 years daily bars (left), 4 months hourly bars (right)
In terms of my chart terminology, I count FC as being in wave 1 {-3} of wave 3 {-2} of wave 5 {-1} of wave 5 of wave 5 {+1} of wave 3 {+2} of wave 3 {+3}. The left-hand chart above shows the rise from wave 5 {+1}, and the right-hand chart, the rise from wave 5 {-1}.

The end of wave 5 {+1}, which began in 2011, will signal the start of a major correction to the downside. The prior rising wave at the {+1} degree took a year to run its course, so wave 5 {+1} is already disproportionate to its degree.

Fifth waves in Elliott, however, have a tendency to extend, so that atypical time span is not atypical of fifth waves.

Also, it is not yet certain that the wave 2 {-2} short-term correction is over. It will take a rise above $22.50, which is 4.9% above today's opening price, to confirm that wave 3 {-2} has indeed begun.

Odds and Yields

However bullish the chart might look, FC's results have been on the dismal side when it comes to bull signals.

The stock has produced 12 bull signals since wave 5 {+1} began in September 2011. Only four of those produced a profit, with an average yield of 10.3% over 47 days. The eight unsuccessful trades lost 6% over 27 days on average.

The results 4.3% win/lose yield  spread isn't awful, but the numbers tell me that FC is prone to whipsaws. It is, after all, a small-cap stock with low trading volume. Such symbols can be disproportionately influenced by short-term speculations.

The present wave 5 {-1}, which began in February, has completed only one bull signals, which yielded 0.2% over 24 days. That's very little yield for the risk.

The Company

Franklin Covey, headquartered in Salt Lake City, Utah, is a consulting company whose business is helping other companies work better. It does for the post-modern service, psychology and tech era what Frederick Winslow Taylor did in the age of vast assembly lines and scientific management.

The company's website states describes Franklin Covey as "a global company specializing in performance improvements. We help organizations achieve results that require a change in human behavior."

The "Covey" part of the company name comes from the late Stephen R. Covey, author of the wildly popular self-help book, The 7 Habits of Highly Effective People. The "Franklin" part is from the Franklin Planner, a popular time-management system.

If return on equity is, a measure of management effectiveness, then Franklin Covey is effective but not highly so. Return on equity is 13%, well below the 20% minimum I require for growth stocks. Debt is 24% of equity, a bit higher than I like.

Earnings tend to peak in the 4th quarter, and each 4th quarter has come in higher than its year-ago counterpart for at least the past three years. The 4th quarter of 2013, especially, saw a spike that carried it to 2-1/2 times its year-ago quarter.

Earnings have surprised to the upside 10 times in the last three years, and to the downside twice, most recently in the quarter before last.

The earnings yield is 3.8%, lower than 67% in the Services:Schools industry. Stocks are selling at 26 times earnings and are priced at a premium to sales. It takes $1.83 in shares to control a dollar in sales. The company pays no dividend.

Institutions own 51% of shares.

Franklin Covey next publishes earnings on July 3.

Liquidity and Volatility

FC on average trades 40,000 shares a day. It has no stock options. Any bull play will need to be structured as long shares.

Without options, no implied volatility calculations are possible. Historical volatility stands at 31% and has been declining since reversing course at 33% in early February. The S&P 500 exchange-traded fund SPY, the most widely traded symbol in the markets, has historic volatility of 12%.

FC's historic volatility is in the 62nd percentile of the one-year range, which puts it on the high side.

Taking historic volatility as an analog for implied volatility, I can calculate that volatility implies that 68.2% of trades will fall between $19.35 and $23.15 over the next month, for a potential gain or loss of 8.9%, and between $20.34 and $22.16 over the next week.

However, the "historic" part means that the calculation is looking backward. Implied volatility looks forward and so produces numbers that I consider to be more accurate.

Decision for My Account

I intend to open a bull position in FC, structuring it as long shares, if it shows upside momentum in the half hour before the closing bell. If momentum has faltered, then I'll put FC on the Watchlist for later consideration.

A more cautious approach would be to wait for FC to beak above $22.50, the level that confirms the correction is over and also the boundary of the 55-day price channel. However, since the trade is unleveraged, I feel comfortable relying on my stop/loss rules to get me out should the correction still be underway.


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 decisions for his or her own account, and take responsibility for the consequences.

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