Monday, June 9, 2014

GRFS: Due for a stumble

Grifols SA (GRFS) has running up the slope at full speed for years, multiplying its price several times over in the process.

It's a bullish picture, but like love and summer, all trends must eventually come to an end. My analysis shows that Grifols' trail has become rocky and is running perilously close to a ravine. Odds are good that the stock is due to stumble soon, tumbling head over heels in a bearish correction.

The Chart

After its initial public offering in June 2011, with an opening price of $15.50, GRFS in the ensuing six months lost 38% of its value.

It has been mainly uphill ever since.

Elliott wave analysis places GRFS in an extremely mature phase of its rise from December 2011, which has nearly quadrupled the price.

The count is all 5th waves, the last wave of a trend, at degrees ranging from weeks to a year.

Click on chart to enlarge.
GRFS 3 years 2-day bars (left), 2 months hourly bars (right)
With the IPO so recent, it is hard to say for certain where GRFS stands at the higher degrees. If I place it within the framework of the S&P 500, then what I have labeled waves 5 {+2} and 1 {+3} should instead be waves C {+2} and A {+3} within an upward correction.

However, GRFS has its home exchange in Madrid, Spain. Although that marketplace no doubt resembles the U.S. markets in our globalized economy, I can't say for a certainty that they match.

Absent that framing, I've chosen a straightforward uptrend count for the higher degrees and have labeled the countertrend correction scenario as an alternative.

Since the {+1} degree is a five-wave upward trend within the {+2} degree, whether that {+2} wave is a 5 or a C makes no practical difference to the analysis -- it is the final wave of the series, and a downward correction, taking back part of the rise from 2011, is the next step in the chart's progress.

Wave 1 {+1} lasted 39 days. The 39th day of wave 5 {+1} was May 24, suggesting that the 5th wave is at a mature place, unless it extends. In the latter case, it could continue for quite some time.

Options are pricing in confidence that 68.2% of trades will fall between $41 and $50.82 over the next month, for a potential gain or loss of 10.7%, and between $43.55 and $48.27 over the next week. I've marked the monthly range on the left-hand chart in blue.

Odds and Yields

GRFS has an excellent record of success since the present wave 5 {+2} began in June 2013. It completed three bull signals in that rise. Two were successful, on average yielding 13.6% over 57 days. The unsuccessful trade lost 3.8% over 19 days.

Bull signals from GRFS have a 66.7% success rate, with a win/lose yield spread of 9.8%. Whipsaws are relatively rare, and the bounty of success is great enough to overcome losing trades when they occur.

The Company

Grifols, headquartered in Barcelona, Spain, is a pharmaceutical and chemicals company that is the world's third-large producer of products derived from blood plasma.

Analysts are generally positive about Grifols' prospects, collectively falling in at a 50% positive enthusiasm rating.

The company reports return on equity of 18%, almost growth-stock levels, but with a high level of debt running 68% higher than equity.

The earnings yield is 3.19%, compared to 2.61% yield on the 10-year U.S. Treasury note. The company's dividend yields 0.46% annualized at today's prices.

Growth estimates, when dividends are included, imply a price of $44.16 per shares, meaning the stock is selling at a 4% premium. I've marked that implied level on the right-hand chart in purple. Generally, for a momentum play, I'm happy with a premium up to 25%; above that, I start having doubts.

The most recent earnings report, for the 1st quarter, came in quite a bit higher than earlier quarters, although it was lower than analysts expected -- a negative surprise. Prior reports have been without a clear trend.

The stock is selling at 31 times earnings, and also at a premium to sales. It takes $3.09 in shares to control a dollar in sales.

The company next publishes earnings on July 28. The stock goes ex-dividend in June 2015 for an annual payout, if unchanged from this year's, of 21 cents per share.

Liquidity and Volatility

GRFS on average trades 751,000 shares a day. It has a moderate selection of option strike prices with open interest generally running to two or three figures.

The front-month at-the-money bid/ask spread on calls is 44.2%, compared to 0.8% for the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

The spread is too rich for my blood, and any position I open will be as long shares.

Implied volatility stands at 37% and has been been falling from its annual high of 73% since April 11. Volatility of the S&P 500 index, by contrast, is 11%.

GRFS' volatility is in the 36th percentile of the one-year range, suggesting long shares or a long futures synthetic equivalent built from options will have the highest chance of success.

Contracts in today's trading are heavily skewed toward calls, running at nearly five times the five-day average volume. Puts are running at 69% of average volume.

Decision for My Account

I have two problems with a GRFS trade.

One is minor -- the lack of options that I can trade means that I miss out on leverage and hedging ability.

The other is major -- the chart shows that the trend is extremely mature and may well end this week, if the time taken by wave 5 to the upside is proportional to other waves in the series.

It's not that I'm bearish on GRFS. It's just that my Elliott wave analysis tells me that the clock is at 5 minutes before the hour when a small cuckoo will pop out and squawk, "Sell! Sell!", as the correction begins.

For those reasons, I'm declining to open a bull position in GRFS.

-- Tim Bovee, Portland, Oregon, June 9, 2014


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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