The Money Tree

Safely Generating Income in Retirement

Posts Tagged ‘APOL’

Potential Trades

Posted by mounddweller on January 16, 2010


When I first started my blog I spent considerable time and effort on expiration weekend identifying, evaluating, and presenting potential trades.  In addition when I executed a trade I was verbose in explaining each of my trades, how I went about selecting them, and why I liked them.  However, as time went on my posts became more matter of fact.  I simply presented the parameters behind my trade and at most a little commentary on why I liked it.  Well, with this post I am returning to my roots so to speak.  This post will give a detailed explanation of what I look for in a potential trade and how I go about conducting my due diligence.  So, let’s get started.

My search for potential trades always begins by running the Scout search engine in VISIONS.  Below is a screen shot of the search criteria that I use:

As you can see my initial search criteria casts a fairly wide net.   However, when I get down to finally selecting my trades my criteria are very specific.  Let’s look at my first pass criteria a little closer.  You’ll notice I choose to not look at any stocks trading for < $10.  There are a couple of reasons for this.  First, stocks trading for < $10 probably are that price for a reason.  But more importantly, unless the stock has options that trade in $1 increments, it is very hard to create a favorable trade in this price range.  For example, say a stock is trading at $8.75.  The two strike prices available to you are $7.5 and $10.  If you choose the ITM $7.50 more than likely your called return will be very small.  On the other hand if you choose the $10 strike the stock has to go up by over 14% before you have a chance at being called away.  In addition, the premium will likely be very small thus making for an unacceptable uncalled return. 

You’ll notice I didn’t specify a maximum stock price in my search criteria.  I don’t want to limit Scout in this regard.    However, it is rare that I’ll do a trade where the stock price exceeds $50.  This is because I want to avoid trading single contracts.  Rather, I want to trade stocks where I can initially write a minimum of two contracts, three is even better.  Thus, my stock price sweet spot is $15 – $30.  However, I will go as low as $10 and as high as $50.  The reason behind these limits is the overall size of my position.  I like to keep my initial entry into a stock at < $5K and my overall position size at < $10-12K.

The three other search criteria I focus on are market capitalization, trading volume, and bare cash.  I avoid trading small cap stocks, which I define as those with a market cap < $1B.  Why?  Quite simply because they tend to be more volatile and it is quite easy to have a good trade head south on you in a hurry.  I also look at trading volume.  Adequate trading volume means liquidity.  If something happens that changes my perspective on a trade I want to be able to get out fairly quickly.  This isn’t always possible with low volume stocks.  Last but far from least, I look at bare cash.  This, in my opinion, is one of the most important criteria.  Bare cash simply means the company has more cash than debt on its balance sheet.  This lets me sleep at night by knowing that if the trade goes against me I’m invested in a company that has cash available to weather the storm and is in no danger of declaring bankruptcy anytime soon.

OK, so there you have the basic rationale behind my initial search criteria.  Now, let’s look at what my search criteria found this week and in so doing we’ll also look at my second, more stringent set of selection criteria.  Below is the Scout report generated by VISIONS using the above screening criteria on the afternoon of Saturday, January 16th.

The first and most important thing to realize is that you can’t take the title of the “Scout Stocks to Buy Report” literally.  Not all of the stocks presented by Scout are suitable for entering a trade.  Further filtering, analysis, and due diligence is required.  To assist us in this process I’ve color coded the criteria I focus on.  Red is unacceptable, yellow is tolerable, and green is good.  For the most part, green values match the criteria Ron Groenke uses in his selection methodology.

The first criteria I use to filter potential trades is the TAI.  I only want to look at trades with TAI = TA.  As you can see of the 10 stocks returned by Scout only 4 meet this criteria.  They are APOL, NITE, ESI, and FSLR.  Note, of late stocks rated TA have been few and far between.  The 9 month run-up in prices since the March ’09 lows severely limited the number of stocks meeting Ron’s criteria.

Next up is the Gold$ score.  Like Ron, I look for stocks with a Gold$ score > 80.  Two of the three variables used to calculate the Gold$ can also be found in the Scout report.  They are the number of consectutive up days and the number of days the stock has traded in the V.  The third variable is best evaluated by looking at the VISIONS stock chart.  We’ll be looking at those shortly.  As you can see of the four stocks which passed our first screen only 2 have a Gold$ > 80.  ESI’s Gold$ Score is 70, while FSLR has a Gold$ of only 38.  You’ll also notice ESI’s closing stock price on Friday, $99.96, exceeds Ron’s buy limit (BL) of $97.18.  For these reasons I would eliminate ESI from further consideration.  Thus, after looking at two criteria, TAI and Gold$ we are left with two candidates, APOL and NITE.

Let’s look at the remaining criteria on the spreadsheet to determine if one or the other clearly is a better pick than the other.  APOL has a perfect Gold$ score of 100 while NITE is right behind it with a 90.  How about Bare Cash?  Well, both have a goodly amount of bare cash.  However, what I like to do is look at the amount of bare cash as a percentage of the stock’s market capitalization.  NITE is the clear  winner in this category as the bulk of its market cap. is in cash.  Conversely, APOL has < 10% of its market cap in cash.  The two stocks are tied in the remaining criteria, Best Fit and Quarterly Earnings. 

So let’s move on to the stock charts and see what they can tell us.  But before we do I first want to discuss the price of APOL.  You’ll recall earlier I said that I don’t like to trade stocks whose price is > $50.  However, in this case I’m willing to make an exception.  Why, simply because we don’t have a wide variety of stocks to choose from.  With only two stocks meeting our other criteria I’m not going to eliminate one just because it is > $50, especially when it has a Gold$ of 100.  Now, on to the stock charts.

First up, APOL.

This is a very good looking chart.  Of course, with a Gold$ of 100, I really didn’t think it would look bad.  Before making a final decision we might want to determine what caused the huge sell-off in at the beginning of November.  I suspect it is disappointing 3rd quarter earnings but we’ll look it up and confirm. 

Let’s move on and look at our other candidate, NITE.

As you can see the chart for NITE is very similar to that of APOL.  Like APOL, NITE experienced a significant drop a couple of months ago.  And, again like APOL it has carved out a bottom and is beginning to move back up. 

OK, so looking at the charts didn’t give us a clear winner.  Let’s move on and look at some of the Key Statistics tracked by Yahoo.  I’ve recorded these in a spreadsheet along with the stats from our other two candidates that we previously eliminated.

The one statistic that catches my eye here is the price/book.  NITE is a clear winner trading at close to book value while APOL is much higher at over 6 times book value.  Again, however, I’m not ready to eliminate APOL from consideration.  On to the final step.  Let’s look at what options are available to us.

In the above spreadsheet I’ve highlighted the near month ATM calls for both APOL and NITE.  These are the options that I always look at first.  If these don’t appeal to me I’ll then look at near month ITM or OTM options.  If I don’t find anything there then I’ll look at the next month out.  In this case, the near month ATM calls are not unappealing.  I’ll take a closer look at them.  It is clear that the APOL options are the better choice.  They have a superior called and uncalled return.  In addition, they also give superior downside protection.

So, after all of this analysis what am I going to do?  Well, based purely on the numbers reviewed in my analysis I believe APOL is the better trade.  However, remember I don’t like to trade stocks priced above $50.  Thus, I am inclined to select NITE as my next trade. 

Now, you’ll recall I also placed a trade in NITE last month.  It finished ITM so I should find that it has been called away when I log into my account tomorrow.  Thus, given my familiarity with NITE, it is one more reason that I’m inclined to choose it over APOL.

That concludes my analysis of these potential trades.  I hope you have found this to be worth your time to read.  I’ll be back tomorrow with another post updating everyone on how my January trades turned out.



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