Wednesday, November 18, 2009

WUHN Post Earnings

On Rev Shark's blog on Real Money a blog participant, Beaky, would often talk about "Fight Club" rules regarding buying stocks before earnings--to do so is a violation of Fight Club rules. Or, one could channel Dirty Harry as one contemplates buying a stock before earnings, and hear "Do you feel lucky today, kid?" Let's revisit WUHN post earnings:

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As you can see, quite a bit of volume came in two days before earnings---followed through on the second day with good volume and good price action. The third day--earnings--had the long black candle that you see in the chart above.

If you were buying on the breakout and just before earnings you were making an exceedingly high risk entry and have a bit more than a flesh wound. I don't buy those breakouts even under normal circumstances (though that is a very successful style for many); I surely would never buy it two days before earnings. Why? Well, I don't want to ask myself, "Do I feel lucky?" Rather, I want to ask myself, "What's my risk of entry at this price level this close to earnings?" Let's take a look at the price range in this stock in the last 3 days, and compare the range to the low of the day (LOD):

Let's look at one more chart with a volatility overlay:

The pink line is the % Bollinger Bands. As you can see, the price action and the volatility go hand in hand. I don't buy during those times. Another Fight Club rule is buying low volatility and selling high volatility. I believe that paying attention to volatility helps me manage my risk better. Or that's how I make my own luck! There is nothing harder to do than to sell into that volatility. The stock might just keep on going. Or it might not. Incorporating volatility analysis into planning my entry and exits has been the single best strategy for me this year.

Now, onto more mundane stuff to put a wrap on Wuhan.........

The earnings were not so bad--and their business is off due to their reliance on the steel industry. Let's take a quick look at some balance sheet 'stuff':

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While I'll take an entry on technicals (volatility squeeze set up) as I did with Wuhan, I like to hold based on what I understand about the company's prospects. For a company with a 30% decrease in sales, I do not expect rises in inventory (171%) and receivables (15%)--they should be liquidating. These numbers are worrisome. Let's take a peek at the backlog:

That softens the worry but just by a bit. I'm interested in seeing the follow through on WUHN to see how other participants react to the news.

Position: Long but with a speculative allocation.

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