Tim Bovee, Private Trader: ENR: Bunny got power?

Update 8/26/2014: By the last half hour before the closing bell, ENR had fallen back within the 20-day price channel, negating the bull signal. Even had I had decided in favor of a trade based on the chart and the fundamentals, ENR would have failed.

Energizer Holdings Inc. (ENR), as it approaches its July high of $123.84, has broken beyond its 20-day price channel, sending a bull signal and, in morning trading at least, confirming it the next day.

However, ENR's best moments of the day were the first 60 seconds, and it has been a stairstep down ever since. Based on that alone, I'm tempted to toss ENR aside as a whipsaw unworthy of another moment's thought.

Yet, having spent the time to analyze the chart, I feel as though I owe this symbol more than a peremptory dismissal. At the least, I want to figure out whether the Energizer Bunny has run out of power.

The Chart

In these analyses I've often sung the praises of Elliott wave counts that come in a series of three, working up the fractal ladder at ever higher degrees, each in the middle portion of a rise.

ENR shows some 3s, but its sort of like a three sandwich, with the lucky number caught between some fives.

If ever there were a number fraught with bad omens in Elliott wave analysis. it is five. The number five is the final wave of a trend. It is the Friday the 13th of waves, bringing anxiety, fear and not infrequently, financial loss to the unwary trader.

Click on chart to enlarge.

ENR 6 years 4 months monthly bars (left), 9 months daily bars (center), 1 month hourly bars (right)

The meat in the sandwich is wave 3 {+2}, which began its rise from $90.59 in September 2013. Internally, that wave is in a counter-trend correction, as wave 4 {+1} to the downside.

By my count, the correction is about to reverse and make a C-wave dive to the downside before resuming its upward course as wave 5 {+1} within wave 3 {+2}.

Elliott wave framing always has ambiguity. Some consider that to be a weakness. I consider it to be an accurate reflection of life in the markets.

If the present wave B to the upside is still underway, and if it carries above the July 1 high of $123.84, then my count is incorrect and wave 5 {-1} to the upside is still active.

The very near term count on the right-hand chart suggests to me that wave C to the downside has already begun.

Note in the middle chart the 17% gap to the upside on April 30, prompted by a large earnings surprise. Prices tend to return to the midpoint of a significant gap; "filling the gap", it's called. The midpoint of the April gap is $106.25, and that provides a potential target for the C wave.

Odds and Yields

ENR has completed two bull signals since wave 3 {+1} began on Jan. 29, one a winner and one a loser. The winner yielded 7.4% over 53 days. The loser fell 1.9% over 14 days. Despite the even odds, the 5.5% win/lose yield spread is quite acceptable.

The Company

Energizer Holdings, headquartered in St. Louis, Missouri, takes its name from the batteries it makes, but it has since branched out into shaving gear, such as Schick, Wilksinson Sword, Personna and Edge; Playtex feminine hygiene and baby products, and Hawaiian Tropic and Banana Boat sunscreens.

The company has announced plans to split off its battery business from the rest of the line, completing the transition to two companies in September 2015.

Analysts are scattered in their assessment of Energizer, collectively coming down with a negative 9% enthusiasm rating.

The company reports return on equity of 17%, a respectable level, with debt amounting to 75% of equity, a bit higher than I like.

The earnings yield is 4.93%, compared to 2.39% on the 10-year U.S. Treasury notes. The company pays a dividend yielding 1.65% annualized at today's price.

Earnings tend to peak in the 1st quarter -- batteries for the Christmas toys? That quarter hit a peak in 2013 and declined a bit in the current year. Energizer has reported four negative earnings surprises in the past three years, two of them this year, including the most recent quarter. The remaining quarters have all seen positive earnings surprises.

Earnings and growth estimates, along with the dividend, imply a "fair" price for ENR of $56.96 a share, suggesting the stock is overpriced by 113%. I've marked the fair price on the left-hand chart in purple.

The stock is also selling a premium to sales, although a less dramatic one. It takes $1.73 in shares to control a dollar in sales.

Institutions own 83% of shares.

Energizer next publishes earnings on Nov. 12. The stock goes ex-dividend in November for a quarterly payout of 50 cents per share.

Liquidity and Volatility

ENR on average trades 523,000 shares per day and supports a moderate selection of option strike prices spaced $5 apart. Open interest is barely existent, with the scattered two-figure strike scattered hear and there.

The options are way too illiquid for me to use in trading, meaning any position I take in ENR will be in long shares, without leverage or a hedge.

The front-month at-the-money bid/ask spread on calls is 7.4%, compared to 1% on the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 17%, compared to 12% for the S&P 500 index, and has been falling from its one-year high of 36% attained July 29.

Volatility stands at the 20th percentile of its one-year range, suggesting that an options spread bought with a net credit has the best chance of success. (However, as noted above, the options are too illiquid for this tactic.)

Options are pricing in confidence that 68.2% of trades will fall between $115.51 and $127.21 over the next month, for a potential gain or loss of 4.8%, and between $118.55 and $124.17 over the next week. That's a very low potential gain or loss. I've marked the range on the right-hand chart in blue.

Contracts are trading slowly today, with calls running 44% below their five-day average volume, and puts 73% below the average.

Decision for My Account

It's a no-brainer really. I'm not taking the trade.

The chart suggests that a downward correction has begun, the potential gain or loss implied by options pricing suggests very little potential profit, especially when leverage and hedging are impossible, and the split-up plans the company has means a year of rumors that can cause sudden surprises and, possibly, losses.

Energizer has good numbers as a company, high return on equity, not-terrible debt, and a price in terms of growth estimates that means someone out there thinks well enough of its prospects to bid up the price.

But in terms of a trade under my rules, the Energizer Bunny is running out of steam.

-- Tim Bovee, Portland, Oregon, Aug. 26, 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.

From time to time 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.