Hello and welcome back to CRI's OnlyDoubles New Trades blog.
It has been about six months since I last posted a trade in the OnlyDoubles Blog. There have been many trades that have come and gone in the interim but because of my family's crisis I took a pause from posting. I am pleased to announce that I have resumed the service and will post when-ever I see a trade that couple double in value come along. The junior stock market has been horribly hit over the summer and as a result, many of my picks are sitting at or near entry levels. Should we get a move to a double point on any of these names I will post an exit blog entry.
This post, as I expect will be the case for some time, revolves around options. Specifically, Call Options (which make money when an underlying asset goes up in price) are today's trade.
While doing our 'First two weeks of the Quarter analysis' in the middle of the month, one specific trend jumped out at me. The Energy and Basic Materials sectors were going to outperform the broader market for Q4'11. The XLE (Oil sector ETF) rallied almost 14% over the study period and far exceeded every other sector measured. Indeed, since that report, Crude Oil itself has moved another 6% higher (as measured by the oil ETF, USO) and looks to be trying to compete a short term bullish flag pole formation which ought to take prices up into the $37 area (which happens to be right around the 200 day SMA). To back up this notion, a report was issued today suggesting funds are buying commodities in size (news link).
So that brings us to today's trade. Nexen Inc. is one of Canada's leading integrated oil companies. It has major operations world wide and follows the broader energy market closely.
Fundamental analysis: The whole market went into free fall over the late summer and I believe this is one company that is trading at ridiculously low valuations. From the July peak to the October trough the company fell by almost 45% [(25-.13.88)/25] of its value. Indeed, the company has been so hard it that it currently trades at a paltry 1.05 times book value. This literally means you are buying the company's assets at cost. Considering the substantial rise in energy prices themselves (over the past few weeks) is it realistic that this company should see a bump too? Insiders seem to agree considering they bought more than 20 million shares, or about 4% of the companies outstanding stock, over the past few months (news link) . Additionally, JP Morgan recently came out with a research note (news link) on October 6th (stock closed that day at $15.85) suggesting Nexen offers "the most attractive combinations of upside to price targets, downside protection, upcoming catalysts and growth in production." Earnings for Q3 are due out on the 28th and it is interesting, as one analyst put it, "The EPS estimate for the company's current year increased from 2.02 to 2.07 over the last 30 days, an increase of 2.48%. This increase came during a time when the stock price changed by -23.54% (from 20.26 to 15.49 over the last 30 days)." (news link). One has to argue that fundamentally, this company is ok. It is trading at the intrinsic value of the company, It is growing its earnings and insiders are are buying.
Technical analysis: A technician often looks at a horible price chart and sees opportunity. A stock that is sitting near its 52 week high seems dangerous to the technician while a stock sitting near its 52 week low seems potentially attractive. This I think is the case with NXY. The stock that was trading at $28 in March and they cut it in half over the period of six months. While I am not screaming BOTTOM, the stock is putting in higher highs and higher lows and momentum has confirmed the price action. But a trending higher market isn't enough for us to justify risking our hard earned money. The next question is of targets going forward. The 1 year 50% level currently is $20.91 (27.94+13.88)/2. More recently, the free-fall from the broader market late-summer sell-off cut the stock by 45%. A 50% retracement of that move would bring prices back into the $19.40 area. And lastly (which further bolsters my believe we will see higher prices in the not too distant future) there is a gap that ought to be filled at $19.10 that was left during the panic selling just a month ago. These then will be my targets going forward ($20.91 to $19.10).
The Trade: The issue for us short term traders is always one of time, or lack of it. To get the biggest bang for our speculative buck we have to limit our time of ownership. Since Options have monthly expiry's, we can buy a short amount of time in the hopes that our target will be hit before expiry. This then is what I have done today. Since we know there are catalysts coming for the company (earnings/exploration/crude prices moving) I am willing to get into the November calls in the hopes that the trade will develop over the coming month. These options expire the Third Friday of November so at the latest I will be out by the end of the first week beginning of the second week of November. If the trade is working I may just roll the position out into a later month.
I have bought 10 of the November $18 calls on NXY (US listed) at $.30. This works out to a risk of just over $300 on the trade. Upon notification of my fill, I placed an order to sell half of the trade (5 contracts) at $.60 to get my original money back in my pocket as quickly as possible. I will let the remianing position ride until either just before expiry (and I have to roll the position out to a later month) or the upside target is hit. I will risk 50% on the trade ($150) or down to $.15 on the option.
Brian Beamish FCSI
The Canadian Rational Investor
the_rational_investor@yahoo.com
the-rational-investor.com
No comments:
Post a Comment