Wednesday, May 14, 2014

WWAV: Bullish on future food

Update 7/9/2014: WWAV closed below its 10-day price channel on July 8 and confirmed the exit signal the next day. I've removed it from the Watchlist, where it has sat for nearly two months without ever making a confirmed breakout above the 20-day price channel.

Update 5/14/2014: WWAV has been trending downward since peaking at $31.48 shortly before 1 p.m. New York time and was off  2.3% with 20 minutes to go before the closing bell. That's insufficient upside momentum for me to take the trade. I've put WWAV on the Watchlist and will consider a bull trade if the stock closes again above the current day's 20-day price channel boundary and confirms the fresh breakout by trading above that level again the next day.

WhiteWave Foods Co. (WWAV) broke above its 20-day price channel on Tuesday, continuing an uptrend that has more than doubled the price of the stock in less than a year and a half.

WWAV still has upside potential before entering a correction that may turn out to be of the sideways variety, limiting the damage to bullish positions. But what goes up can and will go down. WWAV is an expensive stock relative to growth, and traders are a fickle bunch.

The Chart

WWAV began trading in October 2012 and, as is common with new stocks, immediately tanked, declining by 25% in the three weeks following its initial public offering.

The Nov. 20, 2012 low of $14.22 is the starting point of WWAV's uptrend that has carried the price up 121%.

Click on chart to enlarge.
WWAV 1 year 7 months daily bars (left), 30 days 1-hour bars (right)
My Elliott wave count places WWAV in the third wave of that rise, the middle wave, which is often the most robust and which I've labeled wave 3 {+1}.

WWAV is nearing the end of that middle wave as it works its way through wave 5, one degree down. The symbol is in the middle wave within wave 5, suggesting that there is still some upside left.

After wave 3 {+1} is complete, WWAV will correct a portion of the rise that began June 24, 2013 from $15.61. There is no way within the Elliott rule set to predict the depth of the correction, but there are some guidelines.

The correction will be a fourth wave, the second corrective wave, and if the first corrective wave is steep, the second one will often tend to be more of a sideways correction -- a "flat" in the parlance of Elliott wave analysis.

Corrections will often end at one of the major Fibonacci retracement levels, 38.2% ($25.42 on the WWAV chart) for a relatively shallow correction, or 50% ($23.55) or $61.8% ($21.67) for a deeper correction.

Options are pricing in confidence that 68.2% of trades will fall between $28.22 and $33.82 over the next month, for a potential gain or loss of 9%, and between $29.67 and $32.37 over the next week. Those levels, shown on the left-hand chart in blue, cut through the peak of wave 3 at the lower boundary and rise 7% above today's high at the upper boundary.

Note that, on the left-hand chart, I've counted the Sept. 25, 2013 high as the end of wave 1, a decision that places the present WWAV price within wave 3 {+1}.

Had I labeled it as wave 3 {+1}, WWAV would be in its fifth wave at the top degree and my analysis would be much bleaker.

Under the Elliott wave rules, I was forced to drop down a degree and choose the wave 1 label because the third wave cannot be shorter than both the first and fifth waves at the same degree. Wave 1 {+1} is $5.37 in length, and it was clear that wave 5 {+1} under the alternative, more pessimistic scenario had already covered more than $13.  That would have made the third wave, 3 {+1}, the shortest of the three.

Optimist or pessimist? Elliott made the choice, preventing me as the trader from imposing my own hopes or fears on the chart.

Odds and Yields

WWAV has completed three bull signals since wave 3 {+1} began last July. All were profitable, on average yielding 9.6% over 49 days. That means lots of momentum, no whipsaws and good returns on bull plays.

The Company

WhiteWave Foods, headquartered in Denver, Colorado, is a food processor best known by its brands: Land O Lakes coffee creamers, Horizon organic milk, and the Silk line of soy-, almond- and coconut-based milk beverages.

The company defines itself in visionary language. "At heart, we are creators," says their web site. "We're creating a new kind of food company, one that can shape and define the future of food."

WhiteWave was spun off from Dean Foods Company (DF) in 2012, with Dean Foods initially retaining nearly 87% of shares.

Analysts collectively are optimistic about WhiteWave's prospects, coming down with a 27% enthusiasm rating.

The company reports return on equity of 15% with debt running to 67% of equity. The numbers fail to meet my definition of a growth stocks -- 20% return and no more than 10% debt in relation to equity -- but it is a good return all the same.

WhiteWave's earnings yield is 1.83%, less than the 2.55% yield on 10-year U.S. Treasury notes and lower than 92% of other food processing companies . The company pays no dividend.

The earnings growth rate implies a share price of $19.30 (the PEG price), a level shown on the left-hand chart in purple near the beginning of wave 3. WWAV is selling at 61% above that level.

Shares are priced at 54 times earnings and also at a premium to sales. It takes $2.09 in shares to control a dollar in sales.

The company has reported earnings seven times since it was spun off. Each of the last three quarters has come in higher than its year-ago counterpart, although the most recent report failed to show any growth over one quarter earlier.

WhiteWave has surprised to the upside in six quarters and has never produced a downside surprise.

Institutions own 84% of shares.

WhiteWave next publishes earnings on Aug. 11.

Liquidity and Volatility

WWAV on average trades 1.8 million shares a day and supports a wide selection of option strike prices spaced $2.50 apart, with open interest running to three and four figures at a few strikes, but double digits or none at most. The bid/ask spread on front-month at-the-money calls is 8.8%, compared to 0.4% for the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 31% and has been tracking generally sideways since hitting a low last November. The S&P 500, by comparison, has volatility of 12%.

WWAVs volatility stands at the 30th percentile of the one-year range and implies that options spread that are net long in the structure, bought with a debit and expiring in October would have the best chance of success.

Contracts are skewed toward the put side today but without high volume. Puts are trading at 96% of five-day average volume and calls at 65%.

Decision for My Account

I can't open a bull call spread on WWAV because one of the strike prices I need to use has only double-digit open interest, and I require triple-digit at a minimum. I intend, then, to open a position as long shares under my shorter-term trading rules.

The symbol has tons of momentum and the Elliott wave count shows continued upside potential. The stock is very expensive, but that is less important for a shorter-term trade.

I'll place the trade in the half hour before the closing bell if WWAV shows upside momentum. If momentum has faltered, then I'll add it to my Watchlist for later consideration.


My shorter-term trading rules can be read here. My longer-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 shorter-term 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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