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Market Shadows: Group of writers and investors: Paul Price, Lee Adler, and Ilene.
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  • DARK HORSE HEDGE - Snapping Up SNP 1 comment
    Oct 17, 2010 6:15 PM | about stocks: SPN, IOC, HUSA
    DARK HORSE HEDGE - Snapping Up SNP

    By Scott Brown at Sabrient, and Ilene at Phil’s Stock World

    But every day there's a new thing comin'
    china groveThe way of an oriental view
    The sherriff and his buddies
    With their samari swords
    You can even hear the music at night

    And though its a part of the lone star state
    People don't seem to care
    They just keep on lookin' to the east

    We're talking 'bout your China Grove
    Wo ho ho! (Wo oh!)
    Oh, China Grove

    Doobie Brothers 

    There was a time when we looked to the lone star state for our energy investments but it is time to look to the east. China Petroleum and Chemical Corp (SNP) has done things the right way building $18.09 Billion in operating cash flow.  This is the type energy stock Dark Horse Hedge likes for many reasons.  SNP is trading at a P/E of 8.5 while the sector trades at an average P/E of 13.5, the industry at 15.2, and the benchmark S&P 500 at 17.2. SNP projects finishing 2010 with $11.29/share in profit, and $12.81 in 2012.  The five year growth expectation for SNP is 38% per annum, and given its history, those are numbers we can get excited about.  SNP has all the things our bearish energy positions don't have--operating cash flow, earnings growth, and a p/e below sector and industry averages. Unlike our bearish virtual positions in IOC and HUSA, we believe SNP's earnings and growth prospects justify its price. 

    Adding SNP to the virtual DHH portfolio gives us a balanced pairs trade against our HUSA short.  SNP is #8 in Sabrient's VCU ranking system as one of the best value stocks available.  VCU (Value Change Up) is Sabrient’s proprietary forward-looking outlook score which ranks a universe of stocks into quintiles that have proven to be very predictive of performance.  DHH has already recommended positions in three stocks ahead of SNP in VCU ratings, and those stocks have performed well (XRTX, TEO and AXS).

    So, we are "lookin' to the east" and adding SNP as a long position replacing AEO, which had a brief and profitable stay in the virtual DHH portfolio. In addition to adding 100 shares of stock, we are also selling one January 2011, 100 Call against this position in our virtual DHH portfolio.  This will bring the cost basis down from approximately $96-$97 to approximately $92. As we have stated before, 65% of options expire worthless and therefore we prefer to sell time premium than to pay it. SNP has a 2%+ dividend yield and, in addition, this strategy allows us to earn option premium while holding the stock. 

    Covered Call Strategy for Monday, October 18, 2010:

    BUY SNP (9% of Portfolio) on Monday. 

    SELL SNP 100 Jan. 2011 Call (SNP110122C00100000) on Monday. 

    Note: In order to buy 100 shares of SNP and sell one call, we have to allocate approximately 9% of our initially 100K portfolio to this position. Normally our position size is 7.5% of our 100k portfolio but we need 100 shares of stock to sell one call against. 



    Disclosure: none
    Stocks: SPN, IOC, HUSA
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  • CramerFactor(SellWhatHePumps)
    , contributor
    Comments (209) | Send Message
     
    i like this. put a little snap, crackle, pop into my morning.
    18 Oct 2010, 10:36 AM Reply Like
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