What Makes Sense? A Review of Las Vegas Sands

Over the weekend I received the following comment regarding one of the featured stocks in the StockTwits 50 list:

ABDatGA: “@StockTwits50 Continued rise of $LVS makes no sense. Only positives are higher revenues and lower negative earnings. Overall poor fundies.”

First of all, I would like to thank Bruce Dewalt for taking the time to comment on a component of the StockTwits 50 list. Any feedback is appreciated as it will only help us to develop a better list.

The StockTwits score is designed to reflect the catalysts that will define price action over the next 1 to 6 months. It incorporates the factors that matter now.

After “This time is different”, “This doesn’t makes sense” is probably the most frequently used expression among market participants. Personal opinions have never been a source of consistent profits. Specialize in a proven setup and get to know its underlying logic. If you have a shorter-term market horizon, you are “trading people”; you are not buying a piece of a business. If something doesn’t make sense to you, then ask yourself why is the stock making new highs. Maybe someone knows more than you do. Capital market are forward looking mechanisms that strive to discount future fundamentals. They are far from perfect in this endeavor, but this is what creates opportunities for people with different trading horizons and approaches.

I don’t know where $LVS will be 12 months from now. I doubt that anyone knows. I have no impact over its price action. The only things that I can control are what I trade, when I enter, how much I risk and when I exit.

ST50 is an equity selection tool. Last week we noticed that $LVS was breaking out to new highs from a tight base above its rising 10 day MA. History reveals that such breakouts have a very high success rate, especially in an uptrending general market.

Stocks tend to move in groups. Stocks with exposure to the emerging markets’ consumer have been significantly outperforming over the past 3 months. $LVS belongs to that group.

$ISLN

One of the StockTwits 50 stocks, $ISLN is breaking down on a huge volume. The stock had a nice run and at one point in September it was up 30%. Large number of market participants tend to lock in profits in the end of the month.

High volume 8% down days are a clear sign of distribution, so today’s action is a warning sign. With that said,  many institutions are reluctant to buy new highs and prefer to add on pullbacks. In the case of $ISLN, it is very likely to see the stock pull back to its rising 50 day SMA, which will coincide with a previous zone of resistance, having the potential to turn into a support this time. Watch for a bounce in the $20 – $21 area.

Why Earnings' Surprises Matter

One of the most powerful combinations that cause rapid price appreciation consist of neglected stock, low float, big upside surprise and favorable market conditions. Let’s dissect each of these elements by looking through the lenses of $BTH case:

Between April 9th and 15th, $BTH went up from $32 to $57. (80% appreciation in 5 trading days). The reason:

1) Huge upside surprise: on April 9th, the company reported quarterly EPS of $2.59 vs estimates of $2.00 and same quarter, last year EPS of $1.42. Blyth Inc. also guided FY11 earnings at $3.20-3.50 vs consensus estimate of $2.50.

2) Neglect: tiny float of only 5.8m shares. When a catalyst causes an increase in demand for $BTH shares, there is simply not enough supply of them, which naturally results in rapid price move. Other signs of neglect are low ATR and low daily volume. Many are reluctant to look at stocks with average daily volume of under 50k. The truth is that after the appearance of a big catalyst, the price range expands and with it comes the liquidity. If there is a real growth story behind the range expansion, liquidity remains robust and even increases afterwards.

3) In the beginning of April capital markets were still under the influence of relatively high risk appetite. When sentiment is positive, all news is good news and market reaction tends to be favorable.

4) This was the first major positive earnings’ surprise for $BTH after series of consecutive misses.

Only two months after this spectacular 1 week run, $BTH gave back all its gains. The reasons – market went into capital preservation mode in mid May and on top of that $BTH guided lower at the beginning of June.

On Thursday morning I mentioned on StockTwits that I will be paying special attention to $BTH as the company guided higher again and it was close to breaking out from a 2 month range. I noted the 9 days of short interest that could fuel a potential short squeeze. It wasn’t the perfect scenario as the stock was far from its 6 month high, but in the same time risk appetite was gradually turning back into the market. (I prefer to enter stocks that are gapping at new multi-year high as a result of an earnings related catalyst). I don’t expect the stock to repeat its April move – the surprise is not as surprising as it was in April (I hope this makes sense) and sentiment is not at the same level. Nevertheless, $BTH is a typical example of 1-3 days opportunities that earnings’ breakouts bring every quarter.