Heading in the Right Direction

 | Aug 12, 2013 | 9:30 AM EDT  | Comments
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Stock quotes in this article:

lxu

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cf

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tnh

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agu

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dd

Earnings season this quarter has been opening up a number of investment possibilities for the months ahead and LSB Industries (LXU) has caught my eye this week. This diversified holding company is involved in manufacturing and marketing operations through its subsidiaries.

At first, LSB Industries may seem like an odd choice. The company has been struggling in recent months because it has had to make repairs at several chemical facilities, which has put a dent in its profits, year-to-date. It's also been trading relatively close to two-week lows since April. It even missed Wall Street's profit expectations.

So why am I so interested in LSB Industries now? The above drawbacks to investing in the company may not be so negative after all. Its earnings came in at $0.31 per share, just shy of expectations by $0.01 per share. Meanwhile, sales at the chemical maker were down this past quarter by 3.38%, but still came in ahead of expectations with revenue of $202.2 million since the same quarter last year. The average estimate was $181.26 million.

Although the company hasn't offered guidance for the remainder of the year, Jack Golsen, LSB's board chairman and CEO stated, "We have completed necessary repairs and upgrade to our Cherokee and Pryor Facilities that restricted production rates and depressed our financial results in the first half of 2013. These facilities are now operating. We expect our Chemical Business results to improve significantly in the second half of the year. In our Climate Control Business, given the market leading positions of our products, we are well positioned to capitalize on the continued strengthening in demand from both the commercial/institutional and residential sectors, which should lead to further increases in product sales, orders and backlog."

While LSB may not have been operating at full capacity last quarter, it appears to be heading in the right direction.

The technical side of the stock is what has really grabbed my interest. While it's true that LSB has been trading in the lower 50% of its annual trading range for the past year, on the larger monthly time frame, a larger trading channel has been developing over the past two years following a strong rally between 2009 to mid-2011. Trading since then in LSB has been predominantly in the upper half of this larger trading channel.

 

LSB Industries (LXU) -- Monthly
Source: TradeStation

 

With the larger time frame on the side of the bulls, the fact that LSB is near the bottom of this larger trading range is actually quite favorable. It offers the opportunity to build a position at lower levels within a channel that has been developing in favor of an upside breakout. After testing the highs last year, LSB has had two major weekly corrections. Within a trading channel, this is typically followed by a reversal strategy that develops at the lower end of the channel. It's now time to watch for such a development.

 

LSB Industries (LXU) -- Daily
Source: TradeStation

 

Personally, I am in favor of another slightly lower low on the weekly time frame to best allow for a strong reversal off this price zone that would serve as a bear trap and a bull flush, but such action is not necessary. The security may instead build momentum by rounding off at the lows. LSB has my attention and my six-month target is back to the upper end of the channel around $40 per share. Over the next several years, however, I anticipate that LSB will strike new all-time highs without piercing the lower end of the current monthly channel.

Companies related to LSB include: CF Industries Holdings (CF), Terra Nitrogen (TNH), Agrium (AGU) and DuPont (DD).

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