Bull of the Day: Cooper Tire (CTB) - Bull of the Day

This market is as hot as the weather. With a hot market comes crazy valuations and wild stock movements. Rather than jump after a stock that's already made its big moves a market like this calls for a little more research. A little more digging to find that diamond in the rough that may outpace the broad index in the short run. Today I found a turnaround story where the rubber meets the road for the Bull of the Day, Cooper Tire CTB.

With Memorial Day just a few short days ago, I thought keeping an American theme was appropriate. Cooper Tire was founded in 1914 and is headquartered in Findlay, Ohio. They specialize in the design, manufacture, marketing and sales of replacement automobile and truck tires. As American as apple pie, Cooper Tire manufactured pontoons, landing boats, waterproof bags and camouflage for the troops during World War II. Cooper owns a variety of subsidiaries including the famous racing brand Mickey Thompson and part of the South Korean brand Kuhmo.

After a few quarters of disappointing earnings reports Cooper has found traction recently and is regaining ground it lost. An ugly year of misses and downward revisions saw the stock slapped down from the mid-$30s to low $20s during 2013. A quick look at the price and consensus chart outlines the damage of the earnings gaffes.

 

 

So what happened over at Cooper that caused all this? Cooper nearly merged with Apollo Tyres out of India. News of merger caused a worker strike out of protest in a Chinese joint venture manufacturing facility. The strike had a disastrous impact on earnings for the company. That's what needed to work itself out in time. The merger with Apollo was ultimately terminated. Now you're left with a company that has the same growth prospects as it had pre-merger but it's trading 20% off.

After missing earnings by 34 cents and 26 cents back-to-back quarters Cooper bounced back by beating by 10 cents for Q4 2013 and by 22 cents Q1 2014. These beats helped bring back optimism surrounding the company. So much so that three analysts have raised their current year estimates, hiking consensus from $2.18 to $2.63 per share. Next year's numbers jumped from $2.38 to $2.64.

The turnaround for CTB is not just evident in the earnings estimate picture but also in the stock's technicals as well. After reaching a low of $20.55 in December of last year CTB has slowly carved out a bottom and broke higher. You can see the shift in attitude as the 25 day moving average shifted by 5 days changed from being a topside area of resistance with a negative slope to a bottom end support level with a positive slope.  

Early May shortly after the earnings beat of 22 cents CTB gapped higher, going from under $26 to over $28 in a single day. Since then the gap has not been filled but has been tested. Mid-May CTB came down to $26.62 before finding support. Right now it appears that CTB is in an area of consolidation after the rebound from the lows. As this range decreases, the likelihood of a breakout to the upside increases. You can give this a firm top at $29 and a bottom end of $26.50. Traders looking to make a move on CTB should either play the breakout or wait for the low $27s and put on a long trade with a tight stop-loss just outside of the range.

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