My last 11 closed trades have all been profitable. These 11 trades gained a total of 126.8% or 11.53% on average. Two trades topped 18% returns: McDoanld's (NYSE: MCD) and Family Dollar Stores (NYSE: FDO).
However, recent developments in the S&P 500 have put me on my guard. The uptrend line drawn off the early October 1074.77 bottom was broken in early April. Since that time the index has bobbed above and below its 50-day moving average now at 1386. I'm beginning to suspect that this year may lend truth to the saying "sell in May and go away."
In this issue of Trade of
the Week I've looked for fundamentally weak stocks that
show technical vulnerability with the intention of shorting.
This is my first short recommendation in almost two years:
since August 2010 to be exact.
The short candidate is wireless supply-chain provider, Brightpoint (Nasdaq: CELL).
The international electronics wholesaler offers logistics services to cell phone companies like inventory management, customized cell phone kits, credit services and activation services, as well as webhosting and cell phone accessory distribution.
Despite strength in the cell phone market -- global handset sales topped $14.4 billion in the fourth-quarter of 2011 -- not every company in this space is making a fortune from the cell phone explosion.
Apple's (Nasdaq: AAPL) and Samsung's cell-phone divisions, for example, are highly profitable. Other major cell phone manufacturers, including Research In Motion (Nasdaq: RIMM), Nokia (NYSE: NOK), Sony (NYSE: SON) and show decelerating earnings or in some cases outright losses.
Since Brightpoint has distribution agreements with some of these big companies including Research in Motion and Nokia, it is negatively affected by their fortunes. Its latest earnings report on March 2012 came in 23% below analyst's expectations.
Not surprisingly, Brightpoint's stock is down over 50% from its early 2012 high and shows the potential for further technical weakness.
The short candidate is wireless supply-chain provider, Brightpoint (Nasdaq: CELL).
The international electronics wholesaler offers logistics services to cell phone companies like inventory management, customized cell phone kits, credit services and activation services, as well as webhosting and cell phone accessory distribution.
Despite strength in the cell phone market -- global handset sales topped $14.4 billion in the fourth-quarter of 2011 -- not every company in this space is making a fortune from the cell phone explosion.
Apple's (Nasdaq: AAPL) and Samsung's cell-phone divisions, for example, are highly profitable. Other major cell phone manufacturers, including Research In Motion (Nasdaq: RIMM), Nokia (NYSE: NOK), Sony (NYSE: SON) and show decelerating earnings or in some cases outright losses.
Since Brightpoint has distribution agreements with some of these big companies including Research in Motion and Nokia, it is negatively affected by their fortunes. Its latest earnings report on March 2012 came in 23% below analyst's expectations.
Not surprisingly, Brightpoint's stock is down over 50% from its early 2012 high and shows the potential for further technical weakness.
 |
The stock appeared like it
could bullishly emerge out of what would have been a
year-long basing pattern (see dotted semi-circular marking
on the chart) in early January 2012. However, The base
failed, and starting in early January of 2012 after peaking
at $12.05 the shares started sinking.
Since that time the stock has tumbled, forming a steep, accelerated downtrend line.
In mid-February, the long-term uptrend line that had been forming off the stock's August 2010 $5.85 low was broken.
In late April, shares took another hit as the stock sank below important support near $7. This level should now act as resistance.
The stock is currently testing support marked by the August 2010 two-year low at $5.85. If this support level is breached, the stock could continue to fall, since no historical support will be present.
The weak technical picture is backed by uncertain fundamentals.
In late April, the supply chain provider reported disappointing first-quarter results.
Although first-quarter revenue rose 22.9% from the year-earlier period, to $1.37 billion, earnings per share fell 19% to $0.09, from $0.11 per share in the comparable year-ago quarter. Management attributed the drop to strong competition in the wireless industry.
For the upcoming second-quarter, the outlook remains unfavorable. Although revenue is projected to increase 11.4% from the year-ago period, to $1.40 billion, analysts estimate earnings will drop to $0.22 per share, from $0.23 in the comparable year-ago period. This estimate is down from $0.26 just 3 months ago.
For the full 2012 year, analysts expect revenue will increase 9.1% to $5.7 billion. However, , the company expects full-year 2012 earnings to be in the range of $0.98-$1.04, down from between 3% and 8% from $1.07 in full-year 2011.
In addition to a weak earnings outlook, Brightpoint is highly leveraged. The company has amassed $297 million in long term debt, and $1.21 billion in total debt. That number compares to $291 million in total equity -- that means the debt to equity ratio is a heady 4.1 times.
Given that the wireless provider has a questionable fundamental outlook and shows continued technical vulnerability, I plan to short the stock.
Risks to consider: Shares have already suffered substantial downward pressure. Some traders may view the stock as a bargain and could therefore drive shares higher in the short-term. However, given the company's weakening earnings traders should have little reason to move the stock higher in a sustained way.
Brightpoint's shares have bounced off $5.85 support. A bout of short covering could move the shares higher in the short-term. Before entering a position, I will wait until shares breach $5.85 support.
My sell-on-stop order is at $5.79. This means if shares do not hit or go below $5.79, I will not enter the trade. My target is $4.70 where the shares found some buying interest in 2009. My stop-loss is $6.65 where the steep downtrend line from the January 2012 peak would be broken. The risk to reward ratio is approximately 1.26:1.
Since that time the stock has tumbled, forming a steep, accelerated downtrend line.
In mid-February, the long-term uptrend line that had been forming off the stock's August 2010 $5.85 low was broken.
In late April, shares took another hit as the stock sank below important support near $7. This level should now act as resistance.
The stock is currently testing support marked by the August 2010 two-year low at $5.85. If this support level is breached, the stock could continue to fall, since no historical support will be present.
The weak technical picture is backed by uncertain fundamentals.
In late April, the supply chain provider reported disappointing first-quarter results.
Although first-quarter revenue rose 22.9% from the year-earlier period, to $1.37 billion, earnings per share fell 19% to $0.09, from $0.11 per share in the comparable year-ago quarter. Management attributed the drop to strong competition in the wireless industry.
For the upcoming second-quarter, the outlook remains unfavorable. Although revenue is projected to increase 11.4% from the year-ago period, to $1.40 billion, analysts estimate earnings will drop to $0.22 per share, from $0.23 in the comparable year-ago period. This estimate is down from $0.26 just 3 months ago.
For the full 2012 year, analysts expect revenue will increase 9.1% to $5.7 billion. However, , the company expects full-year 2012 earnings to be in the range of $0.98-$1.04, down from between 3% and 8% from $1.07 in full-year 2011.
In addition to a weak earnings outlook, Brightpoint is highly leveraged. The company has amassed $297 million in long term debt, and $1.21 billion in total debt. That number compares to $291 million in total equity -- that means the debt to equity ratio is a heady 4.1 times.
Given that the wireless provider has a questionable fundamental outlook and shows continued technical vulnerability, I plan to short the stock.
Risks to consider: Shares have already suffered substantial downward pressure. Some traders may view the stock as a bargain and could therefore drive shares higher in the short-term. However, given the company's weakening earnings traders should have little reason to move the stock higher in a sustained way.
Brightpoint's shares have bounced off $5.85 support. A bout of short covering could move the shares higher in the short-term. Before entering a position, I will wait until shares breach $5.85 support.
My sell-on-stop order is at $5.79. This means if shares do not hit or go below $5.79, I will not enter the trade. My target is $4.70 where the shares found some buying interest in 2009. My stop-loss is $6.65 where the steep downtrend line from the January 2012 peak would be broken. The risk to reward ratio is approximately 1.26:1.
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