Tim Bovee, Private Trader: R: Bullish on rental trucks

Ryder System Inc. (R), like much of the market, has been on the rise for years. Can it keep on truckin', or is it pulling over into the rest stop?

The chart shows more upside potential before Ryder's uptrend has run its course. But already, the "Rest Stop Ahead" signs are starting to show up on the wayside.

The Chart

Elliott wave analysis places R in the 3rd wave -- the middle wave -- of its rise from its Great Recession low in 2009.

That uptrend, in turn, is in the final wave of its middle wave: Wave 5 of wave 3 {+1} within yet another middle wave of higher degree, wave 3 {+2}.

The end of wave 5 will trigger a correction that will take back a portion of the 70% gain beginning Aug. 4, 2013 from $55.17.

Click on chart to enlarge.

R 3 years daily bars (left), 1 month hourly bars (right)

Wave 5 itself is in its 1st wave of the upswing, wave 1 {-1}, which hit a higher high of $93.85 in trading today before dropping back a bit.

Wave 5 has been underway for less than a month, leading me to count the current rise as in the {-2} degree. It could well be a still lower degree, or perhaps a higher degree, the 5th wave of the {-1} degree. There is no way to tell at this point.

My reason for counting as I did is this: Within the base degree, wave 1 and wave 3 each lasted a bit less than six months. If wave 5 is of comparable duration, then it will carry into January. Putting it in the final wave of the rise seems to be rushing matters quite a bit. Moving the count down one degree gives more time for wave 5 to reach a lifespan comparable to that of its siblings.

However, I must stress that Elliott doesn't require that waves of the same degree be of similar duration. Often they are, but often vary wildly.

Odds and Yields

R has completed four bull signals since wave 3 {+1} began in August 2013. Three were successful, on average yielding 8% over 56 days. The unsuccessful signals lost 5.7% over 14 days, on average. The win/lose yield spread is 2.3%, which I consider to be acceptable but not spectacular.

The present signal is the first to occur within wave 5.

The Company

Ryder System, headquartered in Miami, Florida, is best known for its rental trucks, but also provides fleet management and supply chain management services. It operates in North America, Europe and Asia.

Analysts are extremely optimistic about Ryder's prospects, coming down collectively with a 20% enthusiasm rating.

The company reports return on equity of 15% and carries a high load of debt of more than double equity.

Earnings tend to peak in the 3rd quarter and have been higher in the 3rd than a year earlier for the past three years. The company has surprised to the upside in every quarter of the past three years.

The earnings yield is 5.36%, compared to 2.41% on 10-year U.S. Treasury notes. The company's dividend yield is 1.59%.

Earnings and growth estimates, combined with the dividend, imply a fair price of $102.02, making R undervalued by 6%. I've marked the fair-price level on the right-hand chart in purple.

The stock is also selling at a discount to sales. It takes 75 cents in shares to control a dollar in sales.

Institutions own 89% of the company

Ryder System next publishes earnings on Oct. 22. The stock goes ex-dividend in November for a quarterly payout of 37 cents per share.

Liquidity and Volatility

R on average trades 366,000 shares per day and supports a moderate selection of options strike prices spaced $2.50 apart near the money.

Open interest is in the double digits and so is too small for me to use in trading. Any position I were to open would be structured as long shares.

The bid/ask spread on front-month at-the-money calls is 9.1%, compared to 1.1% on the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 19%, compared to 12% on the S&P 500 index. R's volatility is quite low, in the 7th percentile of the one-year range. Trades with such low volatility tend to do better if structured as long option spreads bought with a credit.

Options are pricing in confidence that 68.2% of trades will fall between $88.16 and $98.24 over the next month, for a potential gain or loss of 5.4%, and between $90.78 and $95.62 over the next week. I've marked the one-month range on the left-hand chart in blue.

Contracts are trading heavily today and are skewed toward calls, which are running at more than eight times their five-day average volume. Puts are running 26% above average volume.

Decision for My Account

The lack of leverage is a negative when I consider the symbol for my account. The 5.4% gain or loss implied by options volatility isn't particularly large. Leverage would make it worthwhile, but without the leverage, I think I can find more productive trades.

I think Ryder is a perfectly good bull play. It just doesn't fit my needs at the moment. I won't be opening a bull position in R.

-- Tim Bovee, Portland, Oregon, Sept. 3, 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.