"Follow
the proper trail."
-- Christina Nikolov
Loosing Its Way
by
Christina Nikolov, Founder ChartWatchCentral
Stock/Ticker: Garmin Limited (GRMN)
Date: March 25, 2003
Opinion: Bearish
Current Price: $36.89
Target Price: $31.56, then possibly $25.80 and $18.69
Commentary:
Investors pushed Garmin Limited (GRMN) up another $2.44 on March 25th, propelling the shares to a new all-time high of $36.89 on turnover which was 150% above the 20-day average of 600,000 shares. (chart #1) GRMN is now perched 110% above its intraday low of 17.70, set on October 10, 2002. Coincidentally, if the shares close above $33.35 on Monday 3/31, they will post their sixth straight month of rising prices. (chart #3)For the quarters ending in September and December 2002, GRMN beat the average guesstimate of Wall Street's prognosticators by 16% and 20% respectively. Earnings came in at $0.29 vs. $0.25 for the former and $0.42 vs. $0.35 for the latter. Going forward, the company is expected to grow its bottom line to $1.46 in 2003 and $1.66 in 2004, from $1.32 in 2002.
When we compared this company to its peer group, we found some reasons to be concerned. First, GRMN is projected to grow its earnings 13% per annum over the next five years, versus 19% for its industry. Meanwhile, GRMN touts a price/earnings multiple of 25 for 2003, compared to 12 for its peers.
From a technical perspective, the shares punched through the upper trendline of a rising wedge on 3/25, a move which we think is a 'premature breakout'. A premature breakout occurs when a stock penetrates the upper end of a bearish pattern or lower end of a bullish pattern, but then moves back within that formation's boundary. Believe it or not, fake-out moves are quite common for rising wedges, with 22% touting premature breakouts. It's almost impossible to distinguish between a fake-out and the real thing, since above average volume makes both look identical on a chart.
Based on our calculations, we project a decline to $31.56, with the potential for additional downside to $25.80. There is even a slight chance that the shares will fall back to and fill an upside gap created on October 28, 2002 at $18.69.
If you are looking to profit from a potential downside reversal, we like the July 40 put (Symbol: GQRSH) at $4.90. And if you want to give the trade more time, consider the October 40 put (Symbol: GQRVH) at $5.90.
Chart(s):
#1) Garmin Limited (GRMN) - Twelve Month Daily Chart
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Click the Chart for an Enlarged View
#2) Garmin Limited (GRMN) - Twenty Eight Month Weekly Chart
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Click the Chart for an Enlarged View
#3) Garmin Limited (GRMN) - Twenty Eight Month Chart
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Click the Chart for an Enlarged View
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