At this point, I'm tempted to say, End of story. But of course, there is always more to it...
The Chart, the Metals and the Company
Mining companies, more than most, have charts that ebb and flow in tune with greater market forces surrounding the products they mine. Manufacturing, service and retails companies are each suis generis. Commodity producers are generic, differentiated only by the quality of their management.
Teck, headquartered in Vancouver, British Columbia, bills itself as Canada's largest diversified resource company. It mines copper, coal used in steel making, and zinc. And it has holdings and aspirations in the oil sands of Alberta.
TCK broke below its 20-day price channel on Wednesday and confirmed the bear signal by trading still lower today. But for Teck, it's a very old story.
The chart shows copper futures on the left and TCK shares on the right. The time-span is the same, from the beginning of 2010, and so its possible to compare the charts by eye to get a since of their sameness.
Click on chart to enlarge.
|Copper futures (left), TCK (right, each 4 years 5 months weekly bars|
The metal's futures are trading 33% below that peak. The company's shares are trading 66% below the peak.
As is often the case, mining shares provide greater volatility than does the underlying commodity.
Many commodities -- gold, silver, crude oil -- saw declines beginning in 2011. Natural gas began its decline earlier.
So TCK is just one possible piece of driftwood to grab onto while being washed downstream by the flood. There are ways to play the secular decline in commodities.
Analysts are certainly washing downstream with the rest of the debris. Collectively they come down with a negative 38% enthusiasm rating on Teck.
The company has respectable base numbers, with return on equity of 4% and debt amounting to 42% of equity.
The earnings yield is 5.16%, compared to a 2.5% yield on the 10-year U.S. Treasury note. The company pays a dividend yielding 3.71% annualized at today's prices.
Earnings have been on a decline since the 3rd quarter of 2011, with a few counter-bumps to the upside. Teck has produced six negative earnings surprises in the past three years, most recently in the past two quarters.
Growth estimates, with the dividend taken into account, imply that a "fair" price for TCK would be $13.47, suggesting that it is overpriced by 63%. This is a good thing for a bear play, of course. I've marked the "fair" price level in purple on the right-hand chart.
The stock is selling for 20 times earnings and also at a premium to sales. It takes $1.50 in shares to control a dollar in sales.
Options are pricing in confidence that 68.2% of trades will fall between $20.18 and $23.74 over the next month, for a potential gain or loss of 8.1%, and between $21.10 and $22.82 over the next week. I've marked the one-month range on the right-hand chart in blue.
Institutions own 59% of shares.
Teck next publishes earnings on July 24. The stock goes ex-dividend June 12 for a semi-annual payout of 41 cents per shares.
Odds and Yields
TCK has completed 15 bear signals since the 2011 peak. Seven have been successful, with an average yield of 12.7% over 41 days. The eight unsuccessful signals lost 6.4% over 15 days, on average.
Basically, a gamble on TCK is a flip of the coin, with nearly even odds. The moderately wide 6.3% win/lose yield spread gives the player some advantage, of course.
Liquidity and Volatility
TCK on average trades 2.1 million shares a day and supports a wide selection of option strike prices spaced a dollar apart near the money, with open interest running to two and three figures.
The front-month at-the-money bid/ask spread on puts is 3.1%, compared to 0.9% for the most-traded symbol on the U.S markets, the exchange-traded fund SPY.
Implied volatility stands at 28%, compared to 12% for the S&P 500 index, and has been stair-stepping lower since hitting a peak of 100% on Feb. 3. Volatility is at the 8th percentile, suggesting long options spreads sold for a debit and expiring in an out month, such as September, would have the best chance of success.
Decision for My Account
I'm not opening a bear position on TCK. I already have a fair amount of exposure to commodities in general, and I'm not sure that I need further exposure, or that Teck is the best way to get it. I simply haven't approached the problem as a choice-of-vehicle decision, at least not yet.
The near-even odds of success are less lopsided than I like. I prefer the Hunger Games slogan: "May the odds be ever in
-- Tim Bovee, Portland, Oregon, June 5, 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.License
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
Post a Comment