Tim Bovee, Private Trader: GPN: Bullish explosion

Global Payments Inc. (GPN) has broken above its 20-day price channel in an explosive movement since the start of October. The rise and subsequent bull signal were initially triggered by Global Payments's announcing it had reached an agreement to buy gaming assets owned by Certegy Check Services Inc. (The announcement may be read here.)

Despite the extreme bullishness triggered by the news, the chart suggests that Global Payments' next major movement will be a significant counter-trend correction to the downside.

The Chart

GPN has been on the rise since August 2012, which marked the end of a triangle correction within the uptrend off of its Great Recession low in March 2009. Longer term, GPN has been in an uptrend since it began trading in January 2001.

Click on chart to enlarge.

GPN 2 years 10 months monthly bars (left), 4 months daily bars (right)

Elliott wave analysis shows the chart to be in its 5th wave up in the 13 years since trading began, and in the 3rd wave since the 2009 low. I've labeled them as waves 5 {+3} and 3 {+2}, respectively.

One degree lower, GPN is in the final wave, 5 {+1}, signifying that wave 3 {+2} is on its last leg to the upside.

There are no guarantees how high it will go before the reversal begins. What is certain is that it will take back a portion of the rise from $64.66 that began on April 29, 2014, and then will reverse again to the upside and push on to still higher highs.

It is a bullish chart, yet one that is nearing a counter-trend correction of significant magnitude. For example, a 50% correction from the present highest high, $77.96, would carry the price down to $71.31. It's not exactly carnage, but it is pain that, as a trader, I would prefer to avoid.

Odds and Yields

GPN has completed one prior bull signal since wave 5 {+1} began in April. It yielded 2.1%, a fairly small amount, over 50 days.

Throughout its rise over the longer term, GPN has had a tendency to break above the 20-day price channel, generating a bull signal, but to fail confirmation, pushing up the channel boundary while not being a trade under my rules. Another term for this behavior is, "head fake".

The Company

Global Payments, headquartered in Atlanta, Georgia, lives up the to "Global" part of its name, providing payment processing services in North America, Europe and Asia. It is a Fortune 1000 company.

Analysts are unenthusiastic about the company's prospects, collectively coming down with a negative 53% enthusiasm rating.

This is despite return on equity of 26%, offset by a somewhat high debt level amounting to 130% of equity.

Earnings tend to peak in the summer quarter and have been rising steadily for at least three years. Global Payments has surprised to the downside five times in that period, most recently in 2013. All other quarters have surprised to the upside.

The earnings yield in 4.64%, compared to 2.42% for the 10-year U.S. Treasury notes. The dividend is minuscule, with a yield of 0.1% annualized at today's prices.

Growth estimates, with the dividend yield includes, imply a "fair" price of $60.36, suggesting that GPN is overpriced by 29%. I've marked the growth-implied price on the left-hand chart in purple.

The stock is selling for 22 times earnings and at a premium to sales. It takes $1.96 in shares to control a dollar in sales.

Institutions control 97% of shares.

Global Payments next publishes earnings on January 6. The stock goes ex-dividend on Nov. 12 for a quarterly payout of 2 cents per share.

Liquidity and Volatility

GPN on average trades 1.1 million shares per day and supports a small selection of option strike prices spaced $5 apart, with open interest running to the double-digits or less.

The front-month at-the-money bid/ask spread on calls is 13.5%, compared to 0.5% on the most-traded symbol on the U.S. markets, the exchange-traded fund SPY.

Implied volatility stands at 23%, compared to 15% for the S&P 500 index, and has been falling from a 33% peak since Oct. 1. The rise to that peak began on Aug. 19 from 19%.

Volatility stands at the 24th percentile of the prior rise, with the implication that options spreads bought with a credit and expiring in an out month will have the best chance of success.

Options are pricing in confidence that 68.2% of trades will fall between $72.56 and $82.70 over the next month, for a potential gain or loss of 6.5%, and between $75.19 and $80.07 over the next week.

Contracts are trading slowly today, with calls running at only 37% of their average five-day volume and puts at 72% of their average.

Decision for My Account

The options are too illiquid for me to use in building a position. Any trade I make will be structured as long shares.

And that presents a problem. GPN, the chart shows, is on the final leg of an upward journey, with a decline looming ever closer. Shares don't give me an opportunity to limit my losses -- to hedge my position -- and neither do they give me leverage that would allow me to get maximum gain from the final rise.

I would consider GPN under my longer-term rules if the dividend were higher, but it is far too low to be of interest.

My judgement is that this is not a trade for me. I won't open a bull position in GPN.

-- Tim Bovee, Portland, Oregon, Oct. 6, 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.