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I am a former engineer in topography (ESGT Paris CN&M) and specialized in metrology or very precise measurement (two Phd). I was interested in quantum metrology for a while... Live mostly between California (Santa Monica), Provence-Cote d'azur (Where my children and grand children live) and... More
  • RIG And SDRL Offer A Good Opportunity Now With Good Dividend. 0 comments
    Feb 3, 2014 3:35 PM | about stocks: SDRL, RIG

    Investment thesis.

    In this article, I will focus on Seadrill limited (NYSE:SDRL) and Transocean limited (NYSE:RIG) as two high-yielding equities that have suffered a severe correction from their recent highs which present a buying opportunity.

    I will look at these 2 companies from a succinct Fundamental analysis point of view and then a Technical analysis using J W Wider's RSI(14).

    In my long trading career, I have found that it is almost impossible to get an honest picture of the fair value of a Company based on the accounting material and SEC filings available or commonly called the financial statements. From the real total shares outstanding including warrants and options to the real impact of the debt (to indicate 2 problems among dozen others) it is a nearly impossible task we must admit. So difficult in fact that probably 99% of us, traders and investors alike, cannot fully comprehend and we are left to trust "analysts" as substitutes with divergent incomplete and opposite views.

    The problem is that, trusting by proxy, without being able to control fully the thinking process given, often lead us to trade in an alienated form that will have serious consequences down the road and could explain this actual total manipulated market.

    The Chart analysis, in the other hand, is a better and simple approach. It can give investors a sufficient control level which will enable us to a better and direct understanding of the investing process. It makes us a so called "intelligent investor" and will minimize the downside risks that presents this ever fluctuating market.

    2 incentives to invest in Seadrill limited and Transocean now.

    • First : High-yielding dividend companies

    1 - SeaDrill limited as a time of writing is a $16 billion dollars company in market cap that is yielding 10.54% in annualized dividends yield, due to its $3.80 per share dividend now. Yes, over 10%!

    The stock price closed at $35.51 yesterday 02/03/2014. Impressive numbers considering the 30year-bond yield under 4% for example.

    The company dividend history since 2010 is quite strong and growing. Dividend should remain strong for quite a while due to the nature of the business and its strong backlog.

    In the third quarter 2013 results, the company increased the quarterly dividends by 4 cents from the previous dividend of $0.91 to $0.95 per share. The increase in the dividends is a reflection of the recent improvement in the free cash flows of the company. Going forward, in anticipation of a steady growth I believe that the free cash flows are most likely to grow ever more in the future and will allow the company to consistently keep a high dividend yield in my view.

    For the ones who are interested here is the conference call 3Q 2013

    2 - Transocean limited as a time of writing is a $15 billion dollars company market cap that is yielding 5.11% in annualized dividends yield, due to its $2,24 per share dividend now.

    The stock price is at $42.37 yesterday 03/02/2014. same Impressive numbers as Seadrill, considering the 30year-bond yield under 4% for example.

    The Company dividend history is less impressive than Seadrill but still quite good. Transocean introduced its first regular dividend in nine years in 2011, but decided to halt it while working through the prolonged legal process to determine liability for the 2010 Gulf of Mexico spill. Transocean has resumed its dividend related to 2012 earnings at $2.24 per share, or $0.56 per quarter, in May 2013 and offer a very good growth prospect.

    Strong fundamentals overall with an actual contracts backlog of 30 billions dollars.

    • Second : an oversold situation with RSI(14) in depressed territory.

    As explain above, I believe technical analysis is more suitable to make a personal investing decision that presents some basic and strong logic. the technical analysis tools is large so and very diversified. Let's keep it simple...

    I favor the use of RSI.


    Because RSI seems a good storyteller, in my view, and can be used in a personalized algorithmic trading, specifically adapted to your needs.

    RSI is short for, "Relative Strength index" which can be classified as a "momentum oscillator" measuring the velocity and magnitude of directional price movements.

    From J Welles Wider's book, "New Concepts in Technical Trading Systems" 1978.
    The RSI is most typically used in 14 days time frame but can be adjusted to your needs of course. There is another RSI called Cutler's RSI but I will not comment on that.

    The RSI Formula is simple math:

    RSI = (100-(100/(1+RS)))

    RS = relative strength = EMA (U,n) / EMA (D,n)

    RS = 14 day EMA of up day closing gains / 14 EMA of down day closing losses.

    Note: If you use the 14 days period, you will need the closing prices for the last 15 days.

    It would be easy to calculate it, but it is not really necessary, unless you want to write your own software. You can rely on the net, using a free chart site. I do advise to use the 14 days period so...

    Here is an example of calculation using QQQQ.

    Basically, RSI is showing an "oversold" situation at 30 and an "overbought" situation at 70 with 50 as a "neutral". This is all we have to know, in fact.

    Note: Wilder also use "divergence" to define market "turning points" but it is too long to elaborate here, although a very important consideration. Let's keep it simple...

    1. SeaDrill limited as a time of writing has an RSI of 23.99 and a quick look at the graph history for the past 2 years is showing you what I mean. RSI went below 25 (around 15) in only one occasion these past 3 years and it was for a specific and dramatic reason that we do not have now. The stock is clearly oversold and present a good opportunity now.
    2. Transocean limited as a time of writing has an RSI of 22.96 and a quick look at the graph history for the past 3 years is showing a RSI low at 22.

    Now, for both company and in general, this oversold situation reverse itself pretty fast and it takes around one to 2 months on average to reverse the trend and trade with RSI at 70+ in a overbought situation.

    Analyze for yourself the 2 charts above. It is very impressive and can be seen as systematic.

    Conclusion: I believe SeaDrill LTD and Transocean LTD present a very good opportunity right now. I favor Seadrill LTD.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: SDRL, RIG
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