So…my last market prediction was a bit too cautious. We’ve had quite a rally since I expressed some remaining bear sentiment in mid April…can’t always be right! I’ve been slowly conceding the bear mentality, but remaining cautious with covered calls as a hedge just in case! However, last week, I took some gains and the stocks I held are no longer covered. Today was a further confirmation of optimism as markets surged on strong volume and the S&P pierced the 200 day moving avrage for the first time in over a year.
I’ve been looking at new investment opportunities for a couple weeks and had a deep watch list ready for the next correction….which never came. So as I slowly ceded my apprehension, I also slowly reduced my watchist top those companies with stellar fundamentals, great market position and strong growth prospects.
Petroleo Brasileiro S.A. (NYSE:PBR)
$40 oil was a joke, but it is now showing real strength in its recent rally past $60. The U.S. economy seems to be bottoming out and with the China/India demand for oil unlikely to fade, I’m feeling more comfortable with the long term prospects of oil investments. I’ve been watching Petrobras for months and I’m admittedly disappointed that I didn’t trust my gut sooner as I’ve missed out on some of the huge rally, but I believe it is still well valued for a long term investment. I bought the $30 July calls and if I get a sustained rally over the next week, I’ll sell $45-50 calls and wait until July to decide if this is a trade or long term position.
Diamond Offshore Drilling, Inc. (NYSE:DO)
I’ve also liked the drillers and invested some serious time in researching 3 companies over the last couple weeks. Transocean is the 800 lb gorilla and perhaps the “safest’ best in the industry. Noble (NYSE:NE) is a smaller player with a majority focus on jackups while Diamond Offshore (DO) primarily focuses on deepwater. In the end I went with Diamond Offshore due to their focus on deepwater, the strong backlog, relatively low capex costs (newbuilds are about done) and a demonstrated willingness to pay special dividends. With these advantages and customers like Petrobras and Royal Dutch Shell, I expect continued strong cash flow which could lead to additional special dividends to compliment the growth potential. I purchased $80 options for July and I intend to exercise these before any potenial dividend announced. I was encouraged by today’s action…the stock gapped up almost 6% on high volume, setting up the right side of this base and possibly preparing to setup a minor handle before taking off…I’m looking to sell $100 calls to hedge my position on the follow through and trade movement in the handle before exercising my options.
Fluor Corp. (NYSE:FLR)
This is an infrastructure play and I also studied Foster Wheeler choosing Fluor in the end due to better diversification, with over half of revenues in the oil/gas industry, 15% industrial/infrastruct... Gloabl Services 12%, Power 9% and Government 6%. Admittedly no expert in this inustry, I was looking for a large company with gegraphic diversification, strong cas flow, stong backlog with new growth potential and some exposure to alternative energy projects to balance exposure to oil and gas.
Diana Shipping Inc. (NYSE:DSX)
I traded Navious Maritime earlier this year and took gains looking for a smaller, more nimble fleet less dependent upon debt. I’m also very interested in Nordic American Tanker Shipping Ltd, but I have plenty of oil exposure so I went with the dry bulk shipper. Shipping rates (BDI) are bottoming, DSX has low debt compared to other shippers, they have a great history of rolling over time charters and has a historically strong dividend. I purchased an in the mone call and plan to exercise and sell calls to hedge once the rally putters out.