Setting The Table – 2-17-13

Ocwen Financial (OCN)

If you’re like me and totally missed this uptrend, then there still aren’t many good options developing. Most of the leading stocks out there are well extended from proper buy points. If you bought correctly, you should be sitting on a nice cushion. If you missed out, make sure you don’t compound your mistake by chasing after extended stocks. Here are a couple setups that I don’t have much faith in:

Ocwen Financial (OCN)

OCN is currently sitting in buying range just above a third stage consolidation that was 13 weeks long. Since that consolidation began, the stock has shown three weeks of accumulation and only one week of distribution. The fact that this consolidation is third stage makes it significantly more risky than a first or second stage consolidation would be. OCN is also scheduled to report earnings on February 28, which further adds to the risk factor.

In its most recent quarter, OCN reported earnings growth of 95% and sales growth of 90%. This was only the second straight quarter of positive earnings growth, which is a negative, however the past eight quarters have all showed sales growth of at least 28%, which is very positive. The company has a return on equity of 8%, which is well below what we like to see, but fund ownership has increased substantially in the past year and OCN is in a very strong finance related industry group.

Magnachip Semiconductor (MX)

MX was one of the only stocks on any of my screens this weekend that was in the process of building a base. Almost every other stock was either well extended or breaking down. MX has constructed a five week long, first stage flat base with a buy point of 16.80. The base contains two weeks of accumulation and two weeks of distribution, but one of the distribution weeks closed at the top of that week’s range, which is a positive sign. A breakout from this base would also be an all-time high for the stock, which we love to see.

In its most recent quarter, MX reported earnings growth of 196% and sales growth of 21%. This was the company’s second straight quarter reporting impressive earnings growth combined with less impressive sales growth. We would prefer to see a slightly higher sales growth rate. Annual earnings are projected to increase only 12% in 2013 and 19% the following year. MX has a very impressive 35% return on equity, has increased fund ownership in each of the past four quarters, and its industry group is towards the bottom, but still inside of our acceptable level.

Sturm Ruger & Co (RGR)

RGR broke out of a fourth stage cup with handle base in mid-January on light volume and has spend the past month floating just about that buy point. It started that base with three straight weeks of distribution and has not seen a single week of accumulation since then. RGR is scheduled to report earnings on February 27.

In its most recent quarter, RGR reported earnings growth of 57% and sales growth of 47%. For an average company, these would be outstanding earnings, but for RGR they marked the second straight quarter of declining earnings growth. The company still rocks a 32% return on equity, which is outstanding, and is in a strong industry group, but has not seen an increase in fund ownership this year.