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Of Plumbers, Pipe-Fitters and Parabolic Profits (NYSE:WMS)

Posted on October 12, 2020

Don’t wanna get too personal here, but we’ve got a few questions.

What would you say about a 55 year old industrial company whose earnings were down 363% this year?

Whose insiders had sold off over a third of their holdings in the last six months?

Whose P/E was 43.6 and P/B was 8.2?

Who offered a half percent annual dividend and carried a debt to equity ratio just a hair under two (2).

Would you go long a stock like that?

And what if we told you the shares had gained 216% since the Batflu bottom in March?

Would you still be on side?

Well… I certainly –

And what if we told you the daily chart looked like this –

Wouldja still be a taker?

Us neither…

The stock we’re eyeballing is Advanced Drainage Systems Inc. (NYSE:WMS), a company that makes pipes and other equipment for the hygienic transport of human ordure.

And as the chart above shows, she’s had quite a run.

But…

  1. With gaps at 58, 48, 38 and 30, and
  2. The shares now at the upper end of their trading band (in red), and
  3. RSI edging ever closer to 80 (in green),

We believe the move is nigh complete.

And the weekly chart would back up that contention.

Here it is –

Technically, the stock is on squishy footing.

  • Weekly RSI is nearing overbought 80 – for a second time in seven months.
  • Only this time, the stock’s 20 bucks (40%) more expensive!
  • MACD is curling higher on a vector that can’t last – in our experience (in blue).  It’s the kind of indication we often see before a complete stall and dive (see similar in February).
  • And price, too, is parabolic (in red), demanding a retracement to one or more of her moving averages, from which she’s disconnected entirely (in black).
  • The 27 Week Moving Average (tan) is currently sitting at a clean Fibonacci retracement measure of 51.  Let’s call that our target.

Great!  So what do we do?

Just follow the instructions.

Chop!  Chop!

We’re selling a CALL spread on WMS to buy a PUT.

And the details are like this –

A Jew and His Money recommends you consider selling the WMS November 20th 65/70 CALL spread for a $2.30 credit (7.00/4.70) and using the funds to purchase a WMS November 20th 65 PUT for $3.10.  Total debit on the trade is $0.80.

Rationale: the rise on WMS is near complete – all the technicals point to a coming cease and desist order at these levels.

We therefore want to own a PUT on the stock.

But we don’t want to pay for it.

By selling the CALL spread, we defray the better part of the PUT’s price.

Breakeven on the trade is WMS $64.20.

Maximum loss is $5.80.  Maximum gain is unlimited.

With kind regards,

Hugh L. O’Haynew

 

One response to “Of Plumbers, Pipe-Fitters and Parabolic Profits (NYSE:WMS)”

  1. Brad says:

    We are in some trouble on the BBY, TTC and PG trades expiring October 16th. The S & P is rising virtually every day! I am gonna wait until things start to turn in the broader market before initiating more shorts. Would like some longs in addition to the shorts. U.S economy on the mend big time despite what you might read or hear from MSM. At least in the South things are about to go boom you can bet on that. Thanks

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