Earnings season is like Christmas for option traders, and it comes 4 times a year. We do a lot of earnings trades with my service and I have posted on my website many of the "Earnings Focus" stories for the major reports where I do a thorough analysis into earnings and provide directional and non-directional options trading strategies.
They can be found at this Link
I also have been putting together a nightly Earnings Snapshot email to subscribers with a more brief overview of the key upcoming earnings, and the best option strategy I am seeing to trade them, some directional, and others volatility strategies.
Here are the ones from this past week, a fairly good win rate:
Wednesday Night Report:
Decker's (DECK) closed down 4.75% on heavy volume with shares rejected at $97.50, a double top, with the potential to re-visit the double bottom at $77.50. Under Armour (UA) beat and raised in apparel and shares still sold off, so it will be an uphill battle for Deckers to react positively, coming off a weak report last quarter when shares were hit hard. The $3.54B footwear Co. is definitely a name to buy for the long term on weakness, shares valued fairly at 17X earnings, 0.97 PEG and 3.37X sales. There is also a 10.3% short float, 3.7 days to cover. Piper recently raised its target to $100, and Analysts are expecting strong International growth. There has not been a lot of notable options action, on July 13th 1,250 August $90 puts were bought at $2.85 that remain in OI.
Trade to Consider: Buy the DECK Aug. 90/85 Put Spread at $1.80 or Better
Expedia (EXPE) shares are in a strong trend and are flagging in a tight $29.50 to $30.70 range, not far from $32.50 and $35 resistance for all time highs. Shares are trading 14X earnings, 2.36X sales and 12.9X cash flow with a 10% short float, the top value in online travel stocks and a name people want to own to be part of the TripAdvisor spin-off later this year. Expedia has beaten Analyst estimates by an average of 13% the past 4 quarters. Benchmark raised its target to $34 this morning, seeing 15% y/y bookings growth, but does note costs rising. Expedia was alerted today with unusual options as more than 2,000 October $31 calls were bought at $1.55.
Trade to Consider: Long the EXPE Aug. 30 Straddle at $2.45 or Better (With 15 Days of Trading Remaining Shares Average 15% of Movement During these Expiration Cycles and the Straddle is Only at 8%)
Veeco Instruments (VECO) is a great value name at 10.27X earnings, 0.47 PEG, 1.55X sales and 2.3X cash value, so downside would appear limited but with orders likely being pushed into 2012 shares could get hit on guidance, and then be a great long term buy. There is a 25.78% short float or 7.4 days to cover, and shares have been sliding, currently with a bear flag set-up, and on a breakdown could target $32.50. JPM lowered its target and estimates on the increased risk of shipment delays to China, cutting target to $60 from $75, so still seeing value. VECO options have been very active including a purchase of 10,000 August $42 puts at $2.25 to open yesterday and 5,000 August $45 puts on July 5th. The options action has been bearish and the IV skew is steep. VECO has not been too wild post-earnings with less than 7% moves the past 5 quarters, although it often extends moves through the rest of the month.
Trade to Consider: Long the VECO Aug. 40/35 Put Spread at $1.75 or Better
KLA Tencor (KLAC) shares have been hanging fairly strong while other Semi's have crashed and will be down tomorrow due to LRCX's report. KLAC is one of the top values among large cap Semi's at 9.6X earnings, 0.69 PEG, 2.47X sales and 3.8X cash value. UBS raised to Buy with a $49.50 target on July 7th. LAM's (LRCX) outlook for chip equipment spending was weak and should impact KLAC's results. KLAC has only averaged around a 3.5% movement on earnings the last 8 quarters. Most of the Open Interest in KLAC is on the call side from buyers in August and September a few weeks ago. On Monday a trader sold 6,600 Dec. 50 calls to open at $1.45.
Trade to Consider: Sell the KLAC Aug. $45/$38 Strangle at $1.10 or Better
VeriSign (VRSN) is a name that hit my screen today as an overvalued Tech stock that could get hit on earnings. Shares of the $5.5B Co. trade 18X earnings, PEG 4.5, 8X sales and 43X cash flow, although cash rich trading 2.8X cash value. Shares have formed a Head and Shoulders topping pattern and a break of $32 would target a move to $27. July 22nd saw the most notable action with 700 of the Aug. 33 and 32 puts each bought offer side.
Trade to Consider: Long the VRSN Aug. $33 Puts at $1.20 or Better (Technicals and Fundamentals Point to Bearish View)
Other volatile movers include ACOM, NTGR, NETL, ARBA, CERN, N, and NXPI.
Tuesday Night Report:
Akamai (AKAM) reports Wednesday night and is coming off of 2 consecutive large gap down moves on earnings as its costs and competition rise, slowing earnings growth, and causing a re-valuation shares. Going back to March of 2010 shares broke out at $27.30 which is a level I see now as support, currently a falling wedge pattern with a double bottom at $29 that looks fairly clean and MACD and ADX with bullish crossovers this week. Shares have upside to $35 gap resistance, and downside to $27.50 in my view. At 17.45X forward earnings, PEG of 2, 5.4X sales and 28.6X cash flow, I would still consider shares rich on valuation with just 12.8% EPS growth seen next year, favoring a further pullback in shares. With narrow EPS beats the prior 2 quarters, Akamai could be set for a headline miss. Akamai shares have moved more than 13% in 6 of the last 8 reports. There are risks to guidance and results are likely to come in near the low end with a slowdown in media traffic for Q2, although another big move lower would immediately make it an attractive buyout target. Order flow has been mostly bullish in the calls the past week and there is a ton of open interest in both puts and calls. The largest trade recently was 1,000 August/November $26 calendar call spreads that traded at $0.98 yesterday, bearish as it looks for shares to head to $26. However, back on June 30th, 3,000 August $35/$28 bull risk reversals traded at a 10 cent credit.
Trade to Consider: Long the AKAM Aug. $31 Straddle at $3.30
Citrix Systems (CTXS) reports Wednesday night and shares are in a channel down pattern that eventually leads to $65, but shares are showing strong support at $72.50, just above its 200 day EMA and a re-test of the breakout move from April. Shares have downside to $65 while a move higher would likely find resistance at $80. Its closest peer in the virtualization market is VMware (VMW) which reported a strong quarter recently. Citrix trades 27.3X earnings, 7.2X sales and PEG of 3.17, another richly valued Tech Co. with a $14B market cap. Morgan Stanley was out with a note this morning that comparisons are tough but Q2 should be solid, but does see conservative guidance. Goldman also previewed the quarter this morning and did not see much reason to own shares into results. Citrix generally moves 6 to 10% on earnings, but last July shares moved 21.9%. There were sellers in the Aug. 75 puts today with 1,496 trading, and a buyer of 80 75/80 call spreads. In late June Aug. 80 puts were active with buyers as more than 4,000 accumulated, but now less than 3,000 in OI so some have taken profits. There was unusual buying in September 70/60 puts last week and Monday a trader bought 500 August 75/65 put spreads at $3.15.
Trade to Consider: Sell the August $80/$70 Strangle at a $3.25 Credit
Cliffs Natural (CLF) reports Wednesday night and the $14B Iron Ore Co. is the best value among all the metals stocks trading 6.5X earnings, 2.7X sales, 3X book, 6X cash and a PEG of 0.47. Shares recently triple topped at $102.50 of a 20 point horizontal channel, but have since pulled back to its 20 day EMA near $95. UBS started shares a Buy with a $122 target earlier this month. Cliffs has averaged around a 6.5% earnings move the past 6 quarters. On June 16th 1500 October 92.5/70 bull put spreads traded, and 1,000 October $100/$97.50 bull risk reversals traded July 7th. A big buyer stepped in today on weakness for more than 1,500 August $95 calls on the $3.75 offer, large bullish buyer.
Trade to Consider: Sell the August $100 Straddle at $8.65 (Bullish Bias Straddle) or Long the August/September $100 Calendar Put Spread at $1.55
Green Mountain Coffee (GMCR) reports Wednesday after the close and has made more than a 10% earnings move the last 7 quarters, and averaging a 21% move the past two. Shares are hanging near all time highs, consolidating above its 20 day EMA. Stifel had a note out recently cautious on K-Cup share losses to partners. Shares of the $13.84B Co. trade at an obscene 42X earnings, PEG of 3, 12.5X book and 7.25X sales. There is a 15.55% short float, 7.1 days to cover. On July 5th a trader bought 1,800 Aug. 80 puts, but went long stock, and July 6th saw sizable buying of 2,500 September $100 calls. A trader bought 900 September $110 calls at $2.30 on July 11th. Another 2,000 September $100 calls were bought July 18th. A trader bought 1,000 August $87.50/$82.50 put spreads at $1.14 on July 21st. Shares could see 75 on weakness or above 105 on strength.
Trade to Consider: August/September $110/$75 Double Calendar Spread at $1.80
Visa (V) will report Wednesday after the close and shares have consolidated under $80 since the big run-up on the debit card fee legislation. Now the company will be forced to deliver on earnings, and with growth slowing and costs rising shares are tough to add after the recent run. Shares trade 15.65X earnings, 8.6X sales and 2.83X book and we have recently seen large blocks of calls being sold with profit taking ahead of results. Some long term thinkers bought 950 March 2012 92.50 calls at $6.10 Monday. Street Analysts have been raising price targets, most near the $100 level.
Trade to Consider: Long the V July/Aug. $85 Calendar Put Spread at $1
Potash (POT) will report earnings Thursday before the open and will look to continue momentum seen in fertilizer stocks since Mosaic's (MOS) strong report. Shares are back near year highs and at resistance under $62.50. Shares have had less than 3.6% moves 3 of the last 4 quarters. Shares trade 15.4X earnings, 7.44X sales and 7.3X book, not a top value name in its industry and getting a bit rich. POT is a name that has been registering high on the call premium leader board the last couple weeks, bullish flow in the options. Today, more than 2,800 of the July 62.50 weekly calls were bought to open while 13,727 August $60 calls sit in Open Interest. On July 10th more than 2,500 December $62.50 calls were bought to open, so the longer term outlook has a bullish bias also. Potash looks to be starting a fresh trend higher after a recent breakout of a descending triangle, and may make a run up to those 2008 highs just under $80 by year end, although a short term pullback to $58.50 to form a cup and handle would be welcomed.
Trade to Consider: Ratio Calendar Spread: Sell 2X August $65 Calls at $0.74 to Buy 1X September $62.50 Call at $2.40, Net Debit $0.92
Thursday, July 28, 2011
Sunday, July 24, 2011
10 Small Cap Earnings of Interest this Coming Week
3D Systems (DDD): The $1.35B Software Co. has been on fire since triggering a breakout buy signal at $20 earlier this month. This is a high growth name projecting 25.56% EPS Growth Next Year and Seeing 51.44% Q/Q Sales Growth. It is highly shorted and trades 23.8X earnings, 7.65X sales and 6.8X book value. The Company improves costs for customers via 3D building systems and modelers. Ford, Hasbro, Mattel, Precision Castparts, Tupperware, and Xerox are a few of its customers. Earnings are July 28th before the market opens.
Barnes (B): The $1.35B Industrial components maker trades 14.8X earnings, PEG 0.99, 1.15X sales and 1.78X book, a good value. Shares have formed a bullish cup and handle and look set to break out. The Company sees FY12 EPS growth above 23%. Earnings are July 29th before the market opens. Barnes beats revenue and earnings estimates 63% of the time and raising guidance 16% of the time.
ACI Worldwide (ACIW): The $1.2B Software Co. is a play on electronic payments with its software, and projects 26% EPS growth next year. Shares trade 23.1X earnings, 2.75X sales and 4.5X book value, currently consolidating with a bullish flag near a breakout. Earnings are July 26th before the market opens.
iRobot (IRBT):The $975M maker of robots is becoming more than just a niche consumer play with its robots now being used for other purposes. Shares trade 27.4X earnings, 1.5 PEG, 2.37X sales and 41.3X cash flow with 8.38% of the float short, which has come down quite a bit. Shares are also in a cup and handle pattern and could project a move to $45 on a strong report. iRobot sees next year's EPS growth at 28.85%. Earnings are July 26th after the market closes. The Company beats EPS estimates 73% of the time and raises guidance 27% of the time.
MarketAxess (MKTX): The $972.4M provider of an electronic trading platform for CDS, Bonds, and more is a name I recently featured in a small cap research report. The Company is seeing great growth in transactions on its platforms and trades just 21.4X earnings and 3.45X book. Shares are forming a bullish consolidation flag and would breakout on a move through $26 and target past $30. Earnings are July 27th before the market opens. MKTX beats EPS estimates 52% of the time.
TriMas (TRS): The $863.5M diversified Industrial has been a hot name with 225% EPS growth this year and projecting 20.5% for next year. Shares trade cheap at 13X earnings, PEG of 1.04, and 0.87X sales. Shares are in consolidation mode into earnings and look to be ready for a move to $30. Earnings are July 28th before market opens.
Viad (VVI): The $455.66M provider of exhibition, event and retail marketing services is a lesser know play on an improving economy where businesses increase spending with Corporate Events. Shares trade 22.9X earnings, 0.5X sales, 1.19X book and 14.15X free cash flow with 61.3% EPS growth seen for next year, an impressive growth name. Shares are nearing a breakout at $23 for a run at $27 highs. Earnings are Friday July 29th before the open.
Tennant Co. (TNC): The $915M maker of cleaning machinery for industrial Companies such as scrubbers, floor washers, advanced sweepers, and also cleaning chemical solutions does not receive a lot of recognition, but shares are hanging out under major resistance at $43 and could target new highs, and with shares at 18.5X earnings, 1.13 PEG, 1.18X sales and 3.6X book value with 27% EPS growth seen for next year and a 1.6% dividend yield, shares are cheap. The niche machinery Co. also makes a lot of sense as a buyout target for a larger Industrial seeking a new industry with a strong growth name that has consistent earnings. Earnings are July 28th before the open. It beats EPS estimates 63% of the time and raises guidance 13% of the time.
Altisource Portfolio Solutions (ASPS): The $937.6M provider of real estate and mortgage portfolio management trades 12.7X earnings, PEG of 0.83, 2.85X sales and 23X cash flow with 45.4% sales growth Q/Q. Shares are consolidating near new highs and have a strong uptrend. Earnings are July 28th before the market opens.
Materion (MTRN): The $841M maker of high performance materials for alternative energy applications is a name I picked up on in the low $30's, and shares are now nearing new highs. Shares trade cheap at 13.75X earnings, 0.6X sales, PEG 1.38, and 2.11X book value, projecting 15% EPS growth next year and seeing 27% sales growth Q/Q. Earnings are July 29th before the market opens.
Barnes (B): The $1.35B Industrial components maker trades 14.8X earnings, PEG 0.99, 1.15X sales and 1.78X book, a good value. Shares have formed a bullish cup and handle and look set to break out. The Company sees FY12 EPS growth above 23%. Earnings are July 29th before the market opens. Barnes beats revenue and earnings estimates 63% of the time and raising guidance 16% of the time.
ACI Worldwide (ACIW): The $1.2B Software Co. is a play on electronic payments with its software, and projects 26% EPS growth next year. Shares trade 23.1X earnings, 2.75X sales and 4.5X book value, currently consolidating with a bullish flag near a breakout. Earnings are July 26th before the market opens.
iRobot (IRBT):The $975M maker of robots is becoming more than just a niche consumer play with its robots now being used for other purposes. Shares trade 27.4X earnings, 1.5 PEG, 2.37X sales and 41.3X cash flow with 8.38% of the float short, which has come down quite a bit. Shares are also in a cup and handle pattern and could project a move to $45 on a strong report. iRobot sees next year's EPS growth at 28.85%. Earnings are July 26th after the market closes. The Company beats EPS estimates 73% of the time and raises guidance 27% of the time.
MarketAxess (MKTX): The $972.4M provider of an electronic trading platform for CDS, Bonds, and more is a name I recently featured in a small cap research report. The Company is seeing great growth in transactions on its platforms and trades just 21.4X earnings and 3.45X book. Shares are forming a bullish consolidation flag and would breakout on a move through $26 and target past $30. Earnings are July 27th before the market opens. MKTX beats EPS estimates 52% of the time.
TriMas (TRS): The $863.5M diversified Industrial has been a hot name with 225% EPS growth this year and projecting 20.5% for next year. Shares trade cheap at 13X earnings, PEG of 1.04, and 0.87X sales. Shares are in consolidation mode into earnings and look to be ready for a move to $30. Earnings are July 28th before market opens.
Viad (VVI): The $455.66M provider of exhibition, event and retail marketing services is a lesser know play on an improving economy where businesses increase spending with Corporate Events. Shares trade 22.9X earnings, 0.5X sales, 1.19X book and 14.15X free cash flow with 61.3% EPS growth seen for next year, an impressive growth name. Shares are nearing a breakout at $23 for a run at $27 highs. Earnings are Friday July 29th before the open.
Tennant Co. (TNC): The $915M maker of cleaning machinery for industrial Companies such as scrubbers, floor washers, advanced sweepers, and also cleaning chemical solutions does not receive a lot of recognition, but shares are hanging out under major resistance at $43 and could target new highs, and with shares at 18.5X earnings, 1.13 PEG, 1.18X sales and 3.6X book value with 27% EPS growth seen for next year and a 1.6% dividend yield, shares are cheap. The niche machinery Co. also makes a lot of sense as a buyout target for a larger Industrial seeking a new industry with a strong growth name that has consistent earnings. Earnings are July 28th before the open. It beats EPS estimates 63% of the time and raises guidance 13% of the time.
Altisource Portfolio Solutions (ASPS): The $937.6M provider of real estate and mortgage portfolio management trades 12.7X earnings, PEG of 0.83, 2.85X sales and 23X cash flow with 45.4% sales growth Q/Q. Shares are consolidating near new highs and have a strong uptrend. Earnings are July 28th before the market opens.
Materion (MTRN): The $841M maker of high performance materials for alternative energy applications is a name I picked up on in the low $30's, and shares are now nearing new highs. Shares trade cheap at 13.75X earnings, 0.6X sales, PEG 1.38, and 2.11X book value, projecting 15% EPS growth next year and seeing 27% sales growth Q/Q. Earnings are July 29th before the market opens.
Thursday, July 14, 2011
Petrohawk Energy (HK) $12.1B Buyout: A Game Changer for Natural Gas Stocks
After the close tonight it was announced that BHP Billiton (BHP) made a $12.1B All Cash Deal for Petrohawk Energy (HK) at $38.75/Share, a 65% premium!
I posted on twitter earlier the detail of a June 27th options trade where a trader sold 30,000 January 2012 $21 puts and bought 30,000 January 2012 $25 calls. The $1M trade will be worth more than $40M on the open tomorrow. This same trade was followed up twice in the past week, each time for 5,000 contracts, and is a trend I have seen in the options market since April. Needless to say, a lot of smart money was betting on Petrohawk being acquired, but I doubt they expected it to come at such a lucrative premium.
At the time of the deal Petrohawk shares were trading 14X earnings, 4.3X sales, 2X book and 14.35 EV/EBITDA, some numbers to keep in mind as we explore other names later in the post.
I see this deal as a game-changer for the Natural Gas stocks, specifically the ones with shale exposure. The hefty premium in an all-cash deal will revalue the acreage across all the shales and the stocks should gain on expectations of future deals. North America is seen as the "Saudi-Arabia of Natural Gas", and there have been a few deals in the last year, but now I think the race is on and there will be plenty of acquisitions moving forward. Foreign Oil Companies have a lot of cash to spend and are looking to enter the US Shale market, and are willing to pay up. The only concern remains environmental, as well as recent questions raised in the Times about companies overstating the productivity of their wells and size of reserves.
Some of the top shale assets in the US include Marcellus Shale, Bakken Shale, Barnett and Woodford, Fayetteville, Eagle Ford Shale, Horn River, Green River Basin, and Haynesville.
A few of the stocks that will be "in-play" tomorrow because of this deal, and should remain strong for the future outlook in the industry are as follows:
Apache (APA), Devon Energy (DVN), Anadarko (APC), EOG Resoources (EOG), Chesapeake (CHK), and Southwestern Energy (SWN) should trade well tomorrow and enjoy the valuation expansion, but are all trading with $15B+ market caps, and I want to focus on the next potential large acquisition candidates, also excluding the small caps.
Newfield Exploration (NFX, $66.90: The $9B Oil & Gas producer trades 10.8X earnings, 4.57X sales 9.5 EV/EBITDA and 2.7X book. Newfield has over 100 potential locations in the Woodford Shale with 6 wells On-Line and 172,000 net acres. It also has 30-35 wells in the Eagle Ford Shale. Stifel raised shares to Buy on July 8th with an $80 target.
Range Resources (RRC, $55.10): The $8.85B Oil & Gas producer trades 35X earnings, 9.55X sales 22.4 EV.EBITDA and 4X book value. On those metrics, shares are pricey to peers, but it owns some valuable assets. Range has assets in the Marcellus Shale, Wolfcamp, Bone Springs, Woodford, and Utica shales. It is the lowest cost producer among the 33 gas companies. Production with a CAGR of 12% and Reserves at 32% in 2010. 86% of its capital budget is focused on the Marcellus Shale, seen by many as the best opportunity. Goldman started shares Neutral with a $63 target in June.
Cimarex Energy (XEC, $83.54) is a $7.15B Oil & Gas producer that trades 9.9X earnings, 4.5X sales, 6.88 EV/EBITDA and 2.65X book value. I have long considered Cimarez to be the best value among gas producers. Cimarex is 67% Natural Gas with 77% proved developed, and production of 590 MMcfe/d. The breakdown for production is 45% Mid Continent, 25% Gulf Coast and 30% Permian. It has assets in Western Oklahoma with the Cana-Woodford Shale and in the Permian Basin it has 125,000 acres at Wolfcamp, 160,000 at Avalon and 60,000 at Cisco/Canyon, all shale targets. Stifel raised to Buy on July 8th with a $105 target.
Ultra Petroleum (UPL, $44.86): Ultra Petro is a $6.86B Oil & Gas Producer trading 15.6X earnings, 7.12X sales, 5.65X book value and 10.12 EV/EBITDA. Ultra Petro grew production 19% in 2010 and is an emerging Marcellus Shale play. The Company targets 50% production growth from 2010 to 2013. Capital One SouthCoast raised shares to Add with a $58 target on June 3rd.
Cabot Oil & Gas (COG, $62.60): Cabot is a $6.55B Oil & Gas Co. that has been on a strong run in recent weeks, and trades 28.55X earnings, 7.8X sales, 3.5X book value and 15.22 EV/EBITDA. Cabot is at a record growth pace with 31% reserves growth and 27% production growth. Cabot has a lot of Oil assets, but its major gas asset is in the Marcellus Shale, and one of the best acreages out there. Howard Weil raised its target to $75 on June 28th, and Canaccord raised its target to $85 with a Buy rating in early June.
Plains Exploration (PXP, $37.29): Plains Exploration is a $5.26B Oil & Gas Co. trading 12.56X earnings, 3.3X sales, 1.5X book and 10X EV/EBITDA. Plains has assets in the Wind River Basin, California, Eagle Ford, and Haynesville. Goldman raised its target to $52 on June 10th with a Conviction List Buy. PXP plans to sell 20% of its deepwater Gulf of Mexico assets in Q3. Its drilling activity in the Eagle Ford Shale looks to be driving growth to the upper end of forecasts.
SM Energy Co (SM, $72.14): SM Energy is a $4.59B Oil & Gas Co trading 21.3X earnings, 4.4X sales, 3.8X book and 11.77 EV/EBITDA. Jefferies has a $73 target, while Canaccord set a Buy and $101 target in June. 66% of revenues are from Oil, while 65% of proved reserves are in Gas (640 Bcf). Its focus is in the Eagle Ford Shale, Bakken, and Granite Wash. It sees 20%+ production growth in 2011.
One smaller Oil&Gas name that is worth a look is $1.6B Swift Energy (SFY) with 119,000 Eagle Ford Shale Acres
A few smaller shale plays like PVA, CRZO, REXX, MHR, and GST could be some big percentage movers, as the speculative names tend to runs after deals like this.
The analysis would be better using industry specific ratios, looking at proven and unproven reserves, etc., but in the essence of time I kept it fairly simple. As far as options activity I have seen the most bullish in COG, SM and PXP of the above mentioned names.
I would last mention that Consol Energy (CNX) has been seeing a massive amount of bullish options activity in September and October, using call spreads and bullish risk rerversals, and is a name I have long seen as likely to sell its valuable Marcellus Shale assets.
A graphic that breaks down many of the Co's is:
I posted on twitter earlier the detail of a June 27th options trade where a trader sold 30,000 January 2012 $21 puts and bought 30,000 January 2012 $25 calls. The $1M trade will be worth more than $40M on the open tomorrow. This same trade was followed up twice in the past week, each time for 5,000 contracts, and is a trend I have seen in the options market since April. Needless to say, a lot of smart money was betting on Petrohawk being acquired, but I doubt they expected it to come at such a lucrative premium.
At the time of the deal Petrohawk shares were trading 14X earnings, 4.3X sales, 2X book and 14.35 EV/EBITDA, some numbers to keep in mind as we explore other names later in the post.
I see this deal as a game-changer for the Natural Gas stocks, specifically the ones with shale exposure. The hefty premium in an all-cash deal will revalue the acreage across all the shales and the stocks should gain on expectations of future deals. North America is seen as the "Saudi-Arabia of Natural Gas", and there have been a few deals in the last year, but now I think the race is on and there will be plenty of acquisitions moving forward. Foreign Oil Companies have a lot of cash to spend and are looking to enter the US Shale market, and are willing to pay up. The only concern remains environmental, as well as recent questions raised in the Times about companies overstating the productivity of their wells and size of reserves.
Some of the top shale assets in the US include Marcellus Shale, Bakken Shale, Barnett and Woodford, Fayetteville, Eagle Ford Shale, Horn River, Green River Basin, and Haynesville.
A few of the stocks that will be "in-play" tomorrow because of this deal, and should remain strong for the future outlook in the industry are as follows:
Apache (APA), Devon Energy (DVN), Anadarko (APC), EOG Resoources (EOG), Chesapeake (CHK), and Southwestern Energy (SWN) should trade well tomorrow and enjoy the valuation expansion, but are all trading with $15B+ market caps, and I want to focus on the next potential large acquisition candidates, also excluding the small caps.
Newfield Exploration (NFX, $66.90: The $9B Oil & Gas producer trades 10.8X earnings, 4.57X sales 9.5 EV/EBITDA and 2.7X book. Newfield has over 100 potential locations in the Woodford Shale with 6 wells On-Line and 172,000 net acres. It also has 30-35 wells in the Eagle Ford Shale. Stifel raised shares to Buy on July 8th with an $80 target.
Range Resources (RRC, $55.10): The $8.85B Oil & Gas producer trades 35X earnings, 9.55X sales 22.4 EV.EBITDA and 4X book value. On those metrics, shares are pricey to peers, but it owns some valuable assets. Range has assets in the Marcellus Shale, Wolfcamp, Bone Springs, Woodford, and Utica shales. It is the lowest cost producer among the 33 gas companies. Production with a CAGR of 12% and Reserves at 32% in 2010. 86% of its capital budget is focused on the Marcellus Shale, seen by many as the best opportunity. Goldman started shares Neutral with a $63 target in June.
Cimarex Energy (XEC, $83.54) is a $7.15B Oil & Gas producer that trades 9.9X earnings, 4.5X sales, 6.88 EV/EBITDA and 2.65X book value. I have long considered Cimarez to be the best value among gas producers. Cimarex is 67% Natural Gas with 77% proved developed, and production of 590 MMcfe/d. The breakdown for production is 45% Mid Continent, 25% Gulf Coast and 30% Permian. It has assets in Western Oklahoma with the Cana-Woodford Shale and in the Permian Basin it has 125,000 acres at Wolfcamp, 160,000 at Avalon and 60,000 at Cisco/Canyon, all shale targets. Stifel raised to Buy on July 8th with a $105 target.
Ultra Petroleum (UPL, $44.86): Ultra Petro is a $6.86B Oil & Gas Producer trading 15.6X earnings, 7.12X sales, 5.65X book value and 10.12 EV/EBITDA. Ultra Petro grew production 19% in 2010 and is an emerging Marcellus Shale play. The Company targets 50% production growth from 2010 to 2013. Capital One SouthCoast raised shares to Add with a $58 target on June 3rd.
Cabot Oil & Gas (COG, $62.60): Cabot is a $6.55B Oil & Gas Co. that has been on a strong run in recent weeks, and trades 28.55X earnings, 7.8X sales, 3.5X book value and 15.22 EV/EBITDA. Cabot is at a record growth pace with 31% reserves growth and 27% production growth. Cabot has a lot of Oil assets, but its major gas asset is in the Marcellus Shale, and one of the best acreages out there. Howard Weil raised its target to $75 on June 28th, and Canaccord raised its target to $85 with a Buy rating in early June.
Plains Exploration (PXP, $37.29): Plains Exploration is a $5.26B Oil & Gas Co. trading 12.56X earnings, 3.3X sales, 1.5X book and 10X EV/EBITDA. Plains has assets in the Wind River Basin, California, Eagle Ford, and Haynesville. Goldman raised its target to $52 on June 10th with a Conviction List Buy. PXP plans to sell 20% of its deepwater Gulf of Mexico assets in Q3. Its drilling activity in the Eagle Ford Shale looks to be driving growth to the upper end of forecasts.
SM Energy Co (SM, $72.14): SM Energy is a $4.59B Oil & Gas Co trading 21.3X earnings, 4.4X sales, 3.8X book and 11.77 EV/EBITDA. Jefferies has a $73 target, while Canaccord set a Buy and $101 target in June. 66% of revenues are from Oil, while 65% of proved reserves are in Gas (640 Bcf). Its focus is in the Eagle Ford Shale, Bakken, and Granite Wash. It sees 20%+ production growth in 2011.
One smaller Oil&Gas name that is worth a look is $1.6B Swift Energy (SFY) with 119,000 Eagle Ford Shale Acres
A few smaller shale plays like PVA, CRZO, REXX, MHR, and GST could be some big percentage movers, as the speculative names tend to runs after deals like this.
The analysis would be better using industry specific ratios, looking at proven and unproven reserves, etc., but in the essence of time I kept it fairly simple. As far as options activity I have seen the most bullish in COG, SM and PXP of the above mentioned names.
I would last mention that Consol Energy (CNX) has been seeing a massive amount of bullish options activity in September and October, using call spreads and bullish risk rerversals, and is a name I have long seen as likely to sell its valuable Marcellus Shale assets.
A graphic that breaks down many of the Co's is:
Wednesday, July 13, 2011
Open Table (OPEN) Options: Having a Great Plan and Not Executing
Open Table (OPEN) is a name that was soaring to start last week, and although it was on minimal volume and right back to resistance, I saw a lot of people playing this one long, or at least via the virtual Twitter trading account.
What I saw was that shares remained in a downtrend since very disappointing earnings last Quarter. You will see this a lot with shares attempting to take a run at the earnings gap, failing, and proceeding to new lows. The move was nothing more than a relief rally in a bloated stock, so that the smart money could short it at a higher price ahead of next quarter's results.
My thoughts were confirmed on July 5th, the day shares were up big, when I saw the options market making large bearish bets. I put out the following note to clients on July 5th:
OPTIONS RADAR: Bears Making Reservations at Open Table
Ticker/Price: OPEN ($87.20)
Analysis:
"Open Table (OPEN) with 1000 Aug. 80 puts bought here at $4.40, more than $580,000 in put premium on the day purchased, and then another 1000 bought at the $4 offer on the PHLX, now total of nearly $1M in put premium purchased versus $300,000 on call premium, buyers of volatility today with earnings set for early August, and a downward bias today. Shares are up 6.5% today, trading at its upper Acceleration and Bollinger Band, very overbought on RSI and Williams %R. Shares were hit hard last Quarter on earnings and valuation is very questionable at 49.2X earnings, 17.5X sales and 65.77X cash flow. There is a 20% short float in shares, and the momentum name may be forming the right shoulder of a head and shoulders pattern which could lead to a big move below $75. BofA reiterated a Buy and $120 target on May 11th, and OpCo raised to Outperform and a $115 target in May as well. The next resistance for optimal short entry may be at $90, the 38.2% Fibonacci."
Each day I put together around 10 of these Option Radar stories to focus on, the action I see as most unusual or significant in the options market. Along with the analysis I provide the trading strategy, if there is one. For Open Table (OPEN) I noted the following on that day:
Trading Strategy: I think shares could definitely see pressure into results with concerns from last Q, so if it gets to $90, the Aug. 80 puts are a nice trade in my view.
Open Table (OPEN) shares hit $90 that day and also the next two days, printing a high of $90.89 on July 7th, and the puts were pricing around $3.50.
As of today's close the puts are priced at above $7, so a 100% move in just less than a week.
A great move, but I failed to ever put in the order, so only a lesson, no hard cash to show for the great plan. Luckily, a few of my subscribers followed the trading strategy, which for me, is the number one priority!
At this juncture I do not want to chase the move, although I see it highly likely shares test $75 support in the coming days, and I could even see a move to $65 post-earnings, as competition is heating up, and International growth is lagging expectations.
Collins Stewart set a Buy and $108 target on July 8th, but I have seen some negative Analyst notes as well come out recently.
What I saw was that shares remained in a downtrend since very disappointing earnings last Quarter. You will see this a lot with shares attempting to take a run at the earnings gap, failing, and proceeding to new lows. The move was nothing more than a relief rally in a bloated stock, so that the smart money could short it at a higher price ahead of next quarter's results.
My thoughts were confirmed on July 5th, the day shares were up big, when I saw the options market making large bearish bets. I put out the following note to clients on July 5th:
OPTIONS RADAR: Bears Making Reservations at Open Table
Ticker/Price: OPEN ($87.20)
Analysis:
"Open Table (OPEN) with 1000 Aug. 80 puts bought here at $4.40, more than $580,000 in put premium on the day purchased, and then another 1000 bought at the $4 offer on the PHLX, now total of nearly $1M in put premium purchased versus $300,000 on call premium, buyers of volatility today with earnings set for early August, and a downward bias today. Shares are up 6.5% today, trading at its upper Acceleration and Bollinger Band, very overbought on RSI and Williams %R. Shares were hit hard last Quarter on earnings and valuation is very questionable at 49.2X earnings, 17.5X sales and 65.77X cash flow. There is a 20% short float in shares, and the momentum name may be forming the right shoulder of a head and shoulders pattern which could lead to a big move below $75. BofA reiterated a Buy and $120 target on May 11th, and OpCo raised to Outperform and a $115 target in May as well. The next resistance for optimal short entry may be at $90, the 38.2% Fibonacci."
Each day I put together around 10 of these Option Radar stories to focus on, the action I see as most unusual or significant in the options market. Along with the analysis I provide the trading strategy, if there is one. For Open Table (OPEN) I noted the following on that day:
Trading Strategy: I think shares could definitely see pressure into results with concerns from last Q, so if it gets to $90, the Aug. 80 puts are a nice trade in my view.
Open Table (OPEN) shares hit $90 that day and also the next two days, printing a high of $90.89 on July 7th, and the puts were pricing around $3.50.
As of today's close the puts are priced at above $7, so a 100% move in just less than a week.
A great move, but I failed to ever put in the order, so only a lesson, no hard cash to show for the great plan. Luckily, a few of my subscribers followed the trading strategy, which for me, is the number one priority!
At this juncture I do not want to chase the move, although I see it highly likely shares test $75 support in the coming days, and I could even see a move to $65 post-earnings, as competition is heating up, and International growth is lagging expectations.
Collins Stewart set a Buy and $108 target on July 8th, but I have seen some negative Analyst notes as well come out recently.
Friday, July 8, 2011
Options Flow Case Study: Yea BEBE! Bebe Stores Jumps 33% in 5 Days
Understanding where options traders are positioned into key events, such as earnings, always gives you an edge up on figuring out the directional bias.
With options activity I look at two types that are important. You have the "High Impact" trades, which are clear signs of Institutional positioning in the options markets, large lots of contracts and flow into a specific strike or spread.
However, I have often found more value in studying how unusual options action is, not always necessarily a giant block of contracts, but an anomaly. The reasoning behind this is that you can not expect to be an expert on every stock, and certain individuals, not just institutions, have better information into events regarding specific companies than you do, and they will position accordingly. Whether this is from insider information, or due diligence with channel checks and such, that is not important, just the outcome is.
Such was the case with Bebe Stores (BEBE), a much maligned retailer that has not done much good for the last few years. On June 2nd, more than 2,000 September $7 calls were bought to open at $0.30, pushing Implied Vol. higher, and running at a rate of more than 10X the average day in call volume for BEBE. Wedbush had raised shares to Outperform on May 5th with an $8 target. I noted the action live that day, as I always do, to my subscribers in the chat room, but that was not the only chance here. Seeing that same store sales were set to be announced, I noted on Wednesday to clients that Bebe Stores (BEBE) shares were acting strong, and still had more than 3,000 September $7 calls in open interest sitting out there, so there was a bullish bias for shares in the options, and the Sep. 7 calls were still trading at that $0.30 price.
Bebe Stores (BEBE) shares jumped more than 15% yesterday after reporting results, and most of the call buyers are sitting with more than a 200% gain.
Knowing how options players are positioned can set you up for quick gains, and although not 100% accurate, which is impossible to expect, it will give you a leg up and point you in the right direction. It also puts you onto the trail of stocks you normally would not give a second look to. I never would have thought twice about BEBE if I had not remembered the unusual call buying just 1 month earlier.
With options activity I look at two types that are important. You have the "High Impact" trades, which are clear signs of Institutional positioning in the options markets, large lots of contracts and flow into a specific strike or spread.
However, I have often found more value in studying how unusual options action is, not always necessarily a giant block of contracts, but an anomaly. The reasoning behind this is that you can not expect to be an expert on every stock, and certain individuals, not just institutions, have better information into events regarding specific companies than you do, and they will position accordingly. Whether this is from insider information, or due diligence with channel checks and such, that is not important, just the outcome is.
Such was the case with Bebe Stores (BEBE), a much maligned retailer that has not done much good for the last few years. On June 2nd, more than 2,000 September $7 calls were bought to open at $0.30, pushing Implied Vol. higher, and running at a rate of more than 10X the average day in call volume for BEBE. Wedbush had raised shares to Outperform on May 5th with an $8 target. I noted the action live that day, as I always do, to my subscribers in the chat room, but that was not the only chance here. Seeing that same store sales were set to be announced, I noted on Wednesday to clients that Bebe Stores (BEBE) shares were acting strong, and still had more than 3,000 September $7 calls in open interest sitting out there, so there was a bullish bias for shares in the options, and the Sep. 7 calls were still trading at that $0.30 price.
Bebe Stores (BEBE) shares jumped more than 15% yesterday after reporting results, and most of the call buyers are sitting with more than a 200% gain.
Knowing how options players are positioned can set you up for quick gains, and although not 100% accurate, which is impossible to expect, it will give you a leg up and point you in the right direction. It also puts you onto the trail of stocks you normally would not give a second look to. I never would have thought twice about BEBE if I had not remembered the unusual call buying just 1 month earlier.
Thursday, July 7, 2011
M&A: DST Systems (DST) a Potential Deal Stock
Short post today, but an interesting trade I saw today, and shares are on a 9 day run and look to be trading like a deal stock:
DST Systems (DST) received buyout interest back in June and shares touched just below $60, but then pulled back to $50, and are now back on the move higher. Shares remain a great value at 8.8X earnings, 0.88 PEG and 7X cash flow, so an offer could come at any time. Options volume surged to more than 15X daily average as one trader sold 1,000 July $55 puts to buy 1,000 August $55/$60 call spreads for a net debit of $1.50.
DST Systems (DST) received buyout interest back in June and shares touched just below $60, but then pulled back to $50, and are now back on the move higher. Shares remain a great value at 8.8X earnings, 0.88 PEG and 7X cash flow, so an offer could come at any time. Options volume surged to more than 15X daily average as one trader sold 1,000 July $55 puts to buy 1,000 August $55/$60 call spreads for a net debit of $1.50.
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