Last Thursday, one of my one of my longer-term holdings reported earnings, once again bringing it to the forefront of my attention. That company is LSB Industries (LXU), a diversified holding company involved in manufacturing and marketing operations through its subsidiaries. It first wrote about it last summer, when it was testing the lower end of a weekly and monthly trading channel in the low $30s, making it an ideal location to watch for reversal strategies for both short-term and longer-term investments.
It struck my six-month price target of $40 per share in four-and-a-half months before pulling back within the channel shown on the monthly chart below. It has now extended that monthly trading channel so that the current monthly correction is comparable to the correction that took place between 2008 and mid-2011. From the perspective of a longer-term investor, this makes it a great time to revisit this position.
Source: TradeStation
Corrective moves in the market are interesting within a trend for many reasons, but one characteristic that I noticed over the years is that a period of correction lasting a given amount of time, such as 30 days, will often be repeated again before the next continuation can gain a foothold. In other words, if a second correction within a trend also lasts approximately 30 days, a continuation strategy has a better chance for a successful break to new highs (or lows in the case of a downtrend.) LSB Industries is currently coming out of that second correction and it is now comparable in time to the first.
While there is currently no daily continuation strategy developing on the upside like the two I discussed in August, which triggered in late August and November (see daily chart below), I still believe that the channel is favorable for continued accumulation and that we have yet to see this company's full potential.
Source: TradeStation
Early last year, LSB was facing several challenges. Production rates were restricted due to repairs and upgrades at its Cherokee and Pryor facilities, which the CEO cited as a reason for depressed financials in the first half of the year. Its earnings report last November showed that it was still struggling. This resulted in that lower weekly low that struck shortly thereafter.
While the Pryor facility did return to operation heading into the fall, it once again experienced downtime while repairs were made to the facility's primary ammonia plant. It is estimated that this downtime cost the company $23 million to $29 million in operating income last quarter.
Despite the holdbacks from Pryor and news that net sales were lower last quarter at $149 million compared with $177.1 million in the fourth quarter of 2012, investors are seeing signs of improvements, and this is being reflected in increased strength on the charts. The net income applicable to common shareholders in the fourth quarter of 2013 was $37.3 million, or $1.58 per diluted share, compared with $11.6 million or $0.49 last year. Meanwhile, EBITDA, which is essentially net income with interest, taxes, depreciation and amortization added back in, was $79.5 million last quarter compared with $24.3 million in 2012's fourth quarter. As the numbers strengthen and the company works through these latest setbacks, I believe we will continue to see share strength improve as well, eventually breaking through to new highs with the possibility of testing them as early as year's end.
At the time of publication, Hansen was long LXU, although positions may change at any time.