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SteinMart Up 1,160% In Six Months

08/28/09 11:46:03 AM
by Donald W. Pendergast, Jr.

Its not often that you see a stock rise more than 1,000% in six months, but that's what we're looking at now. Even better, the stock's earnings estimates trend is projected to rise dramatically throughout 2009-10.

Security:   SMRT
Position:   Accumulate

Jacksonville, FL-based SteinMart markets a variety of apparel, shoes, and accessories for men, women, and kids in retail outlets across the United States. Just six months ago, the stock was selling for a mere $1.00 per share, almost looking as if it were ready to be delisted from the NASDAQ, when it began to rocket higher in the wake of the powerful March 2009 reversal in the broad markets. No big deal, plenty of stocks did the same thing, but SMRT is one of a handful to have risen more than 10-fold in the two quarters that have passed since the turnaround. What's going on with this stock, and more important, is it too late to get in now?

FIGURE 1: SMRT, WEEKLY. Time and again, breakouts from low-volatility basing patterns (also known as flat-base breakouts) can provide investors and traders with outstanding opportunities in which to deploy their capital. Bullish money flow divergences are a great tipoff as to the likely direction of such breakouts.
Graphic provided by: MetaStock.
By the end of February 2009, SMRT had begun to hit rock bottom, flopping around near the $1.00 price area for three months. The stock didn't appear to have much of a future, but at least the fact that it had stopped falling so precipitously was a small comfort to those shareholders left holding their nearly empty SteinMart bags.

Meanwhile, savvy technicians and big money institutional players (of mutual funds) had their eye on the wonderfully bullish money flow divergence that was growing stronger by the week [Chaikin money flow (CMF)(34)], despite the go-nowhere, lackluster price action on the chart (Figure 1). What trained technicians were waiting for was a breakout (up or down) out of the basing pattern, a pattern in which volatility had all but vanished. If there was going to be a breakout, the results could be worth waiting for, especially given the strong money flow situation.

Well, the breakout arrived; first came the nice break higher during the week ended March 13, 2009, followed by a much more powerful follow-through move the following week, a move that took out a prior significant high on the left side of the basing pattern. At that point, there was little doubt as to the near-term direction for SMRT prices.

A few weeks after the momentous breakout, the longer-term money flow trend began to move higher; that trend is still intact and getting stronger now that it has officially crossed its zero line (see bottom of Figure 1). SMRT's trendlines have also confirmed the increasing power of this rally; in the wake of May's massive wide-range weekly bar, the trend began to accelerate at a higher angle of attack and is still looking very bullish. Right now, very strong multi-Fibonacci support levels span the range from $9.74 to $9.96 and also from $8.78 to $9.18 and should offer meaningful support when the inevitable corrective moves begin to appear in this outrageously strong retail apparel stock.

But now we need an answer as to why SMRT has run up so far, so fast in the first place. The answer is relatively simple, and here it is: Stocks whose earnings estimates are raised by stock analysts tend to attract more retail investors (and traders) and big institutional money than lesser stocks do. Think of it this way -- which company's stock would you rather hold for an investment, one that is generating increasing sales, earnings, and returns on equity, or would you rather buy a stock that shows a history of negative earnings, drooping sales, and poor return on shareholder equity?

Simply put, during the past six months, a lot of money has been pouring into SMRT because major-league investors believe SMRT's earnings growth rate projections are worth the investment of their capital. At some point, SMRT's share price will probably overshoot its intrinsic fundamental value, causing a significant price correction, but for now, the money looks like it's still coming in at full throttle for this high-flying retailer.

Other than waiting for a correction for additional long entries, is there a way to play this astounding move in SMRT right now? Perhaps there is; as of Thursday's close a September 2009 $12.50 call could be sold for about $0.80, yielding an annual rate of return of nearly 75% if your 100 shares of SMRT stock were called away. Since the broad markets may yet have another two to three weeks before the weekly cycle high is expected to top out, this trade could actually be considered a low risk. Trade management is easy -- buy 100 shares of SMRT at tomorrow's open and then work your best price on the sale of that September $12.50 call option. You might be surprised at how much option prices can jump around on an intraday basis, so sometimes a little patience pays off, especially if you learn to read your intraday charts with increasing accuracy. Alternatively, you can simply submit a buy-write order, in which you'll buy the 100 shares of stock and sell the $12.50 call in one simple transaction. Bid-ask spreads are wide on SMRT, so be prepared to work your order to get a decent fill.

If filled, simply sit back and wait for September options expiration, using the upper weekly trendline (see the thin blue line in Figure 1) as your de facto stop-loss point. If SMRT makes a weekly close below the line, you unwind the whole deal and take a small loss. Given the technical and fundamental state of this stock, this is the kind of covered-call play that can make trading such a fun way to make a living -- the stock has everything going its way, the trade risk is small, and the broad market is still in bullish mode. Now that's the smart way to trade.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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Date: 08/31/09Rank: 4Comment: 

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