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LPX
Dec 11, 2003 - LPX has consolidated within a double-top pattern, with bearishly following volume. A decline through the support formed by the confluence of the intermediate low in the double-top pattern, and the rising trend-line should result in much lower prices...
Analysis: Louisiana-Pacific Corporation (LPX) is a manufacturer and distributor of home building products. Sales are derived primarily through operations in the US, Canada, and Chile. LPX has a long history of gross underperformance; the long-run performance of the stock has lagged their major competitors, and has failed on several occasions to meet analyst expectations for EPS results. Given this, we feel that the stock should be trading at a steep discount to competitors. However, contrary to our analysis, LPX trades at a price over book (P/B) ratio very similar to many much more positively and consistently performing companies in the same industry. For example, while LPX has a P/B ratio of 1.71, WY has only a minor premium, with a P/B ratio of 1.91, and GP has a discount, with its P/B ratio at 1.51. Furthermore, LPX trades at a price over sales (P/S) premium! LPX has a P/S ratio of 0.95, in contrast to WY’s 0.68, and GP’s 0.37. While the company’s recent restructuring may be a positive for long-term risk reduction and profitability, it should be noted that many companies suffer in the short-term from adoption problems, especially when the company had not before been implementing a continuous improvement program; as a result, we do not expect the restructuring will be as beneficial to earnings as shareholders appear to be expecting. LPX has consolidated within a double-top (DT) pattern, with bearishly following volume. A decline through the support formed by the confluence of the intermediate low in the DT pattern, and the rising trend-line should result in much lower prices.
A secondary analysis of price divergences supports the bearish portent of the DT; the stock has diverged positively in the short-term, while it has diverged negatively in the long-term. These opposite divergences suggest significant downside potential.
Key Levels: Stop short on a break of the confluence of major support lines. Support lines converge at 16.90. We would short at 16.74. We would place a protective stop loss at 17.26, above resistance. The target of the short would be 15.06, just above the technical target of the double top pattern. Risk to Stop Loss: 3.1% Discuss this article in the forum. ...thanks
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Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.
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by Larry Swing
