Monday, March 10, 2014

Investing in Home Health Care Earnings Growth

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Face it, the country is getting older. Demographics are changing. The Mustang Sally’s are becoming little old ladies from Pasadena. Eventually there will be huge demand for nursing homes, assisted living, and adult day care. So naturally companies in this space should benefit as more and more baby boomers reach that age where they need a little extra help getting around.

Today, about 1 million Americans live in senior care facilities. That number is expected to double by 2030. Long term care facilities saw over 8 million people in 2012 alone. By any metric you measure it, demand is increasing at an impressive clip. Many companies have entered this wide open space due to the relatively low barriers to entry. Among them is our Bull of the Day.

I am usually the momentum trader that finds high flying stocks to buy high and sell higher. Today I’m going to show you another side to my trading. Today I found a stock that looks more like a turnaround story than a momentum stock. This stock was brought back to life in November and now looks like a high flier. Now the stock sets up for a conservative trade with limited downside risk as long as your stops are set properly. Given the recent volatility, this stock could also double if the earnings story continues to strengthen.

Almost Family (AFAM) is a Zacks Rank #1 (Strong Buy) that has turned things around recently. The Louisville based adult day care provider is focused on serving adults looking for alternatives to traditional nursing home placement. The company provides transportation to and from its centers which are open 7 days a week and serve about 60 patients per location. This stock once traded in the $40s but after a deteriorating earnings picture the stock has been dead money for the better part of four years now. A quick look at the Price and Consensus chart shows a stock that has struggled in the face of downward earnings pressure.

The technical picture on AFAM is really a tale of two stocks. One stock was the washout we saw from late 2009 until November 2013. An ugly chart that kept getting worse and worse by the day. The other story is the strong rally we saw from November 2013 until now. This is a great momentum story that has investors hungry for more. Whenever you see a huge jump in stock price fueled by earnings, it really helps to lean on Zacks Rank. From a technical perspective, huge jumps are great for Fibonacci analysis.

The Fibonacci levels can be used to help me determine where a stock may see support after a big run. In the case of AFAM, the important level that we are concerned with is the 50% retracement of the run from November 2013 to the high in December. This gives us a price level right around $26 as a good support level. The trick is to watch this area of potential support and wait for a buy signal from, in this case, the stochastic indicator. Well in the case of AFAM, that’s exactly what we have. The stock found support around $26 and just a few days ago showed a bullish stochastic cross while the stochastics were oversold.

This combination sets up AFAM for a good chance of rebounding from the level we are at now near $27 to retest $30. The best part about this trade is the downside risk is limited. You can put a tight stop loss just below $26, maybe even down at $25 and have a very favorable risk versus reward on this trade.

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