Tim Bovee, Private Trader: FGP: A longer-term play

Ferrellgas Partners L.P. (FGP) with its Blue Rhino brand is one of the major players in the propane gas tank exchange market, where the company pulls up with a fresh tank, puts it in place, and hauls the empty tank away.

Structured as a master limited partnership, it pays a high dividend and so is best suited under my rules as a long-term trade.

Nature provides Ferrellgas with its market, and that lends a certain stability to its operations. One thing we've learned for certain from the wildly popular TV series Game of Thrones: Winter is coming.

The Chart

FGP is a high-dividend symbol and so its chart tends to range sideways more than symbols whose main claim to beauty is capital gains.

The stock ended what appears to have been a correction in October 2008, rose to a peak in February 2011, corrected down to April 2012 and then began the present uptrend, the one that important for this trading decision.

Elliott wave analysis shows FGP's uptrend, wave 3 {+4}, to be ambiguously bullish.

Click on chart to enlarge.

FGP 13-1/2 years monthly bars (left), 2-1/3 years daily bars (center), 3 months 2-hour bars (right)

The present rise, from $13.35 beginning April 16, 2012, has so far touched a high of $28.25, slightly below the wave 1 {+4}. Until that prior high of $29 is breached, there will remain a possibility that FGP is in fact in a B wave within a countertrend correction of a downtrend.

Whichever might be the case, FGP is clearly in the third wave of the movement -- wave 3 {+4} according to my preferred count, although the possibility exists that it might be wave B {+4}.

The internal count, on the middle chart, shows that FGP is within the 5th and final leg up within wave 3 {+4}. A B-wave shouldn't count as five waves internally, yet this wave does, suggesting that the bullish count is correct and that FGP has significant upside ahead over the longer term.

On the right-hand chart I've used the base degree to count the internals of wave 5 {+3}, the current rise that began March 21 from $21.24. The degree is a guess, of course. It may well be higher or lower; it's too early in the process to tell.

What I can conclude from the right-hand chart is that FGP is in the final stages of an uptrend that has covered 33%, and the correction that follows, if it begins soon, may well carry the price down to $25, give or a take a buck or two.

Options are pricing in confidence that 68.2% of trades will fall between $21.60 and $34.40 over the next year, for a potential gain or loss of 22.9%, and between $26.15 and $29.85 over the next month. I've marked the annual range on the middle chart in blue.

Odds and Yields

FGP has completed eight bull signals since wave 3 {+4} began in 2012. Seven were successful, on average yielding 5.4% over 44 days. The losing trade lost 6.3% over seven days.

The resulting yield spread is a negative 0.9%, which is not good. However, the large numerical skew in favor of success -- an 87.5% success rate -- may well overcome that detail.

The present rise, that began March 21, has completed one bull signal. It yielded 9.9% over 34 days.

The Company

Ferrellgas, headquartered in Overland Park, Kansas, distributes the Blue Rhino brand of propane gas throughout the United States and Puerto Rico. It bills itself as the nation's "largest provider of propane by branded propane tank exchange", serving a million customers.

The stock is branded as a master limited partnership, typically a natural resources business that is a limited partnership, but one that is traded on the public exchanges. It is usually a dividend play because of legally required distributions under that MLP structure.

The company's earnings yield is 2.33%, compared to 2.61% over the 10-year U.S. Treasury note. The dividend yield is 7.14% annualized at today's prices. It is so much greater than the earnings yield because of the MLP distribution requirements.

Propane is a seasonal product, so Ferrellgas reports quarterly losses for half the year. The cold-weather profitable quarters have seen increasing earnings, year-after-year for the past three years, and decreasing losses in the warm-weather quarters.

Out of the last six profitable quarters, Ferrellgas has surprised to the downside twice and to the upside three times.

Growth estimates combined with the dividend suggest a "fair" price for FGP of $24.95 per share, meaning that the stock is overvalued by 12.3%. Generally I'm OK with anything up to a 25% overvaluation, allowing a bit of room for irrational hope.

I've marked the "fair" price in purple on the center chart.

The stock is selling for 43 times earnings but at a slight discount to sales. it takes 97 cents in shares to control a dollar in sales.

Ferrellgas next publishes earnings on Sept. 24. The stock goes ex-dividend in September for a quarterly payout of 50 cents per share.

Liquidity and Volatility

FGP on average trades 271,000 shares a day and supports a small selection of option strike prices spaced $2.50 apart in the money, with out-of-the-money open interest running to three figures on one strike, two figures on another, and one to none on the rest.

The front-month at-the-money bid/ask spread on puts is 22.5%, compared to 0.7% for the most-traded symbol on the U.S. markets, the exchanged-traded fund SPY.

Longer-term trades require the ability to hedge during downturns, and it will be difficult to use this stock's options as a hedge. Any trade will require that I find an avatar to using as a hedging vehicle. It's an energy play, and that sector provides a large menu of hedging opportunities.

Implied volatility stands at 23%, compared to 12% for the S&P 500 index. FGP's volatility stands at the 41st percentile, in the neutral range that favors long shares as a vehicle for trading.

Contracts today are skewing toward puts, which are running 12% above their five-day average volume. Calls are running at only a third of average volume.

Decision for My Account

I like FGP as a trade under my longer-term rules for its yield, its rising earnings and the fact that the cold season creates a market for its product. The lack of a native hedge is a slight detriment, but solvable.

I intend to open a bull position in FGP under my long-term rules. However, because there is a major monetary-policy announcement scheduled, I'll hold off on making the trade until Wednesday's close, requiring as always that the price show upward momentum before entering.

-- Tim Bovee, Portland, Oregon, June 17, 2014

References

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.

Disclaimer

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.