This week's trade of the week is likely to be another tough one if the politicians cannot come to a helpful solution and bipartisan agreement to our debt ceiling/deficit situation. Last week was very bearish with little signs of bullishness making any upside trades very complex. I have been sitting on my hands after stops were triggered and waiting patiently on the sidelines to aggressively act, something that is very tough for me as I seek excitement and thrive on fast-paced action. I expect a pre-market gap in the markets for Monday morning, I am just unsure which direction at the moment, but slightly leaning towards bullish. As I'm writing this, we are hearing potentially positive headlines of a deal, but even if we reach a deal before the deadline, will it be beneficial? If not, any bullish action could be short-lived. With that in mind, any trades this week will be at a higher risk due to being handcuffed by the debt headlines.
This week we are eying Newpark Resources (NYSE:NR). Yahoo finance has the following profile information for NR.
"Newpark Resources, Inc. and its subsidiaries provide fluids management, waste disposal, and well site preparation products and services primarily to the oil and gas exploration and production industry. The company operates in three segments: Fluids Systems and Engineering, Mats and Integrated Services, and Environmental Services. The Fluids Systems and Engineering segment offers drilling fluids products and technical services to drilling projects involving subsurface conditions, such as horizontal, directional, geologically deep, or deep water drilling. This segment also provides completion fluids and equipment rental services. The Mats and Integrated Services segment offers mat rentals, location construction, and related well site services to exploration and production customers in the onshore U.S. Gulf Coast, western Colorado, and northeast U.S. regions; and mat rentals to the utility industry in the United Kingdom. It also installs access roads and temporary work sites for pipeline, electrical utility, and highway construction projects. This segment manufactures and sells DuraBase composite mat systems for domestic and international markets, as well as for use in its domestic rental operations. The Environmental Services segment processes and disposes waste generated by oil and gas customers, and provides onshore drilling waste management and reclamation services. The company provides its products and services primarily in the United States Gulf Coast, west Texas, east Texas, Oklahoma, North Louisiana, Rocky Mountains, and northeast region of the United States, as well as Canada, Brazil, the United Kingdom, Mexico, and North Africa. Newpark Resources, Inc. was founded in 1932 and is headquartered in The Woodlands, Texas."
Last Thursday after the close, NR reported better-than-expected earnings, but saw an early morning sell-off come Friday morning. I attribute this to the overall market concerns and to the following statement released during earnings that may have spooked some large holders with significant profits to protect.
"Subsequent to the end of the second quarter, our largest customer in the Mats and Integrated Services segment informed us that they intend to reduce the number of mats utilized on their drilling sites. As a result, we anticipate that our rental and services revenues within the Mats and Integrated Services segment will decline approximately $6 million to $7 million in the third quarter of 2011 from second quarter 2011 levels as we redeploy available mats to customers in other locations."
Paul Heyes, President and CEO, also had this to state:
"The second quarter of 2011 was another record quarter for Newpark as we achieved new high marks in both quarterly revenues and profit. Revenues increased sequentially in all of our operating segments, contributing to sequential growth of 14% in consolidated revenues and 22% in consolidated net income. Strength in U.S. drilling activity, gains in market share, and the continued roll-out of our Evolution" drilling fluid system contributed to a 22% sequential increase in U.S. revenues within our Fluids Systems and Engineering segment. Internationally, following the April completion of the previously announced Rheochem acquisition, our Asia Pacific business unit contributed $6.6 million of revenues in the second quarter of 2011."
The reduced rental and services revenues could be a concern for third quarter earnings, but we have another three months to go before we worry about whether those earnings will be light, in-line, or better-than-expected. As of right now, NR appears undervalued and saw two new analysts initiate coverage with buy ratings between $12 and $12.50 on July 21st. That is about a 34% increase from current levels to $12.50 with 52-week highs made just the other week at $10.09. The current short percentage of float, as of July 15, is about 10%.
Technically speaking, NR is about 8% off 52-week highs and saw a solid rebound on strong volume after the early morning sell-off Friday morning. This created a hammer candlestick on the chart on very strong volume that we have not seen since late-January. A hammer pattern after a sell-off is a good indicator of short-term strength developing where shorts will want to cover. Many stops were likely triggered during that sell-off that was seemingly unwarranted. Therefore, we will look to see those who were stopped out initiating new positions in NR. This should create additional buying support, but keep in mind that the overall market activity around this debt ceiling could put a cap on any upside expectations in the near future.
The trade is to buy a starting position above Friday's highs of $9.31 and look to add on a move above Thursday's highs of $9.63. We may want to take some profits if we move towards 52-week highs on low volume only to add back aggressively if we do indeed breakout to new 52-week highs on the first try. I anticipate we may need two attempts to breakout to new 52-week highs, so look for a healthy light-volume pullback after the first attempt to start adding back with adjusted stops. I'd be extra cautious initiating the position on an early Monday morning move that may not be sustainable after initial enthusiasm for the week subsides.
6 Month Chart
I would keep stops relatively tight here and be taking profits quickly. Again, this is mostly due to the overall market being held hostage to the headlines which can turn ugly in the blink of an eye. A tight stop would be placed just under $9 or the 50-day SMA. A looser stop would be placed under $8.75 as that would give reason to believe we test and break below Friday's lows.
Other stocks on my swing trade radar this week which are showing bullish setups are Pioneer Drilling (PDC), PDL BioPharm (NASDAQ:PDLI), Key Energy Services (NYSE:KEG), CVB Financial (NASDAQ:CVBF), Akorn (NASDAQ:AKRX), and Town Sports International (NASDAQ:CLUB).
As always, do your own homework to see if you agree. Good luck out there.
Disclosure: I am long PDC. I may initiate a position in any of the stocks mentioned over the next 72 hours. Positions may change at any time.