Table of Contents
Leaps Trader Commentary
They say a rising tide floats all boats and this week was no exception. Despite oil prices hovering around $68 the transportation index rallied to a new all time high and managed to stop us out of the two transportation shorts. The midweek drop in oil prices to $65.50 coupled with some good earnings from UPS and the railroads was just too much fuel for the sector.
Earnings from most companies reporting last week were substantially better overall then the first week of the season when several high profile disappointments were seen. This brought investors back into the market and shorts were squeezed on both Thursday and Friday.
With the oil companies reporting stellar earnings once again many of the leaders continued to move higher. However, some companies did miss estimates simply due to over eager analysts not taking into account the 50% haircut in gas prices over the last eight weeks and the extreme volatility in November. Still the news was full of "record oil earnings" alerts and talk of windfall profits taxes.
Next week is a strong week for energy earnings with oil hovering just under $68. I would be surprised if prices rose over 470 but then I have been surprised with the gains over the last month. The Iran news is given as the main excuse for the +$10 rise in prices but there is really no immediate threat. Any action on Iran is still months away and there have been recent events that could be seen by some as a prelude to a settlement. However, having generals on TV pointing out sites that would be bombed and discussing decapitation of the Iranian government is not conducive to falling oil prices.
I had hoped the -$4 drop in prices early in the week would give us an opportunity to pick up some oil stocks cheap but it was just not enough of a drop to hit my targets. I continue to refrain from entering energy plays at this level. Oil is only $2 from an all time high with the end of winter demand slump just ahead. On Friday oil prices rose +1.50 but many energy stocks finished the day well off their highs. Some several dollars off their highs. I know it is frustrating to not be adding additional energy plays but the timing is just not right.
Timing on adding other than energy plays is also bad since there is a historical pattern of declines after earnings. I hate to be entering new puts with the market giving the appearance of a breakout in progress and for that same reason I hate to go long at new highs. Again, our patience will be rewarded.
February Natural Gas expired at $8.18 and right at an eight month low. Unseasonably warm weather simply killed the gas rally and supplies are well above normal and 20% above the five-year average. It would take a new ice age to appear to make a dent in the current levels sufficient to move prices materially. Supplies are at the second highest level ever for this time of year.
OPEC meets next week and comments from their leaders indicate there are no plans to consider production cuts. This could be the signal speculators need to begin unloading some positions. If OPEC is going to keep producing at these levels ahead of the spring demand slump there should be a real surplus of oil shortly. Fundamentalists continue to say there is more than $10 of speculation in the current price and the clock is ticking away on winter demand. There should be a dip in our near future as long as Iran does not become a bomb magnet.
I am dropping KKD this weekend as I mentioned last week. The NYSE gave them another 90-day extension to file financials. This gives them until the end of April. The original play was entered to take advantage of their pending delisting from the NYSE. They won their appeal and it is time for us to leave.
I considered adding some LEAPS on Affiliated Computer after they made the extremely surprising move of announcing a buyback of 45% of their stock. This comes only a week after they broke off talks on an acquisition by a buyout firm. Something is fishy here and I will look to enter some calls on any pullback. The Dutch auction is from Feb until early March. That should give us time to get an entry.
Valero - Be sure to read the update on the Valero position ahead of earnings on Tuesday.
Crude Oil futures Chart - Daily
Changes in Portfolio
Portfolio Listing & Top Picks
Most Recent Plays
MTG - $65.59 - M.G.I.C. Investment Corp ** Stop $68.00 **
Despite a hike in dividend from 15 cents to 25 cents and the announcement of a new 10 million share buyback, bullish housing news and a very bullish jump in the markets MTG only gained +50 cents for the week. I see that as a very positive event for our Puts. Earnings were two weeks ago and there should not be any further positive news.
Original play description:
MGIC provides mortgage insurance to lenders for borrowers with high loan to value ratios. The borrower pays the mortgage protection insurance premiums with their monthly payment. With the very high loan to value mortgages of the last couple years MGIC has a rising risk of default. Earnings were on Thursday and revenue fell -8% along with a net decrease in premiums received of -8.2%. New insurance written also fell. The percentage of delinquent loans at year-end rose to 4.52% from 3.99%.
I know several homeowners, three in the same block, that are only days/weeks away from foreclosure and everyone had taken advantage of the accelerating home values to refi, some more than once. Home values have fallen nearly -20% in this Colorado area despite what you read in the papers. The foreclosure boom is coming and MGIC will suffer.
MGIC Investment Corporation is a holding company that, through its wholly owned subsidiary, Mortgage Guaranty Insurance Corporation (MGIC), provides private mortgage insurance in the United States to the home mortgage lending industry. Its principal products are primary mortgage insurance and pool mortgage insurance. Primary mortgage insurance may be written on a flow basis, in which loans are insured in individual, loan-by-loan transactions, or may be written on a bulk basis, in which a portfolio of loans is individually insured in a single, bulk transaction. It is licensed in all 50 states of the United States, the District of Columbia and Puerto Rico. In addition to mortgage insurance on first liens, the Company provides lenders with various underwriting and other services and products related to home mortgage lending through other subsidiaries.
Buy 2008 $65 LEAP Put YHM-MM currently $6.50
Insurance Call: None
Entry $67.22 (01/15)
LEND - $49.46 - Accredited Home Lenders ** Stop Loss $52 **
That -$5 drop from the prior week was completely erased and LEND returned to resistance at $50. Earnings are not for two more weeks but Cramer is pounding the table on LEND at least twice a week now. All we need is some further indication of a softening economy and the tide should turn back in our favor. Maintain the stop at $52 just in case resistance is broken.
Target support at $42 for a profit exit.
Original play description:
LEND is a sub-prime mortgage lender. Another way to put that would be to say they lend money to those with weak credit. If the housing market is really slowing and housing values declining then sub-prime lenders could be in trouble.
We have already seen mortgage application rates sink to levels not seen since 2004. The Mortgage Application Index decreased to 545.9 last week, -17% below the level from just four weeks ago and more than 10% below the same period in 2004. Refinancing has fallen to levels -20% below 2004 levels.
The days of the mortgage-refi to get out of debt are gone. Tighter loan restrictions and higher default rates are commonplace across the country. I have a son in the mortgage business and he claims applications have fallen through the floor and restrictions are rising. Borrowers who refied a year ago can't get an approval today despite substantial equity left in their homes.
Option loans, where the lender gives the borrower a smaller payment for the first 2-3 years have evaporated. Even ARM loans are falling, down -4% in the latest numbers.
Ironically Fannie Mae and Freddie Mac raised the limits for conforming loans by +16% as of Jan-1st. This means the conforming loan limit for a single-family property rose from $359,650 in 2005 to $417,000 as of Jan-1st. This should increase the level of loans except that property values are slowing and credit criteria is rising.
The Mortgage Bankers Association expects loan originations to fall by -18.6% in 2006.
In October National City said loan profits fell -91% over the same period a year earlier. H&R Block blamed a $86 million loss on a drop in income from its mortgage unit.
If this trend continues sub-prime lenders may have to set aside more money as reserves to cover defaults at a time when loan initiation profits are also shrinking. The smaller pie available to all lenders is making competition for loans even more cutthroat. Many lenders MUST do loans to survive and they will be forced to take lesser credits, greater risks and receive less income for those risks.
Lenders are already slashing staff in an effort to maintain profitability.
LEND published an earnings outlook on Dec-19th for Q4. They said they expected to earn $7.70 to $8 per share compared to analysts estimates of $7.74. HOWEVER, Accredited Chairman and Chief Executive James Konrath said that the projected earnings target depends largely on pricing in the nonprime mortgage market and assumes growth in loan originations but lower costs of origination. That is a very big IF. I could make a million dollars next month if I could pick the exact top in January and then short 1000 SPX futures contracts. That is not going to happen. LEND may reach its targets but there is still trouble ahead.
I am only using a June Put option on this play despite LEAPS being available. All lenders will see a spike in loans in April/May as the summer selling season arrives. I would like to be out by then.
Accredited Home Lenders Holding Co. (Accredited) engages in the business of originating, financing, securitizing, selling and servicing non-prime mortgage loans secured by residential real estate in the United States. Accredited focuses on borrowers who may not meet conforming underwriting guidelines because of higher loan-to-value ratios, the nature or absence of income documentation, limited credit histories, high levels of consumer debt, or past credit difficulties. The Company originates loans primarily based upon the borrower's willingness and ability to repay the loan and the adequacy of the collateral. Accredited originates its loans primarily through independent mortgage brokers across the United States and, to a lesser extent, through its direct sales force in its retail offices.
Buy June $45 Put QFW-RI currently $4.70
No Insurance: LEND hit an all time high in December at $51.70. I put the stop just over that high.
Entry $47.45 (01/08)
FCX - $62.99 - Freeport McMoran ** Stop Loss $55 **
FCX closed at a new high on Friday and a +$5 gain for the week. Earnings are behind us and FCX posted big gains. Now it is all about gold prices and the trend is still up. Gold closed at $558.60 on Friday and $585 is being promoted as the next target. I added a stop loss this week and removed the insurance put.
Freeport-McMoran Copper & Gold Inc. is a copper and gold mining and production company. The Company's principal asset is the Grasberg mine. Grasberg contains gold reserve and copper reserves. Its principal operating subsidiary is PT Freeport Indonesia. The Company owns approximately 90.64% of PT Freeport Indonesia, and the Government of Indonesia owns the remaining approximate 9.36%. PT Freeport Indonesia mines, processes and explores for ore containing copper, gold and silver. It operates in the remote highlands of the Sudirman Mountain Range in the province of Papua, Indonesia, which is on the western half of the island of New Guinea. PT Freeport Indonesia markets its concentrates containing copper, gold and silver worldwide. The Company also smelts and refines copper concentrates in Spain, and markets the refined copper products through Atlantic Copper, S.A., the wholly owned subsidiary of the Company among others, such as PT Irja Eastern Minerals and FM Services Company
2007 $55 LEAP Call OMT-AK @ $6.00
Insurance put: Cancelled - not triggered 1/29
Entry $52.00 (12/21)
DTX - $430.99 - Dow Jones Trans Index ** Stopped 430 **
The drop in oil prices early in the week in addition to record earnings by UPS and Burlington was too much for the shorts to cover. The squeeze on Tuesday morning never letup and we were stopped on Thursday at 430.
Original play description:
The Dow Transports have been in vertical mode since the October lows. The decline in oil/gas/diesel prices has given them wings and the strong growth in Q4 shipping sent them to new highs.
January has not been kind to the transports for the last five years. In 2005 the first three weeks of January saw a drop of nearly -400 points in the transportation average. In 2004 the decline did not begin until the 3rd week of January but continued for nearly -400 points. The decline in 2003 begin with the opening of trading for 2003 and continued for nearly -500 points to bottom on the week of March 9th. 2002 losses were somewhat moderate compared to 2003-2005 with only a decline of around -250 points but it did start with the opening of trading for 2002. 2001 was ugly with more than -575 points lost from the end of December high at 3157 to the March low at 2578. In 2000 the index fell from 3017 to 2260 for a whopping -757 point drop.
While nobody can forecast a repeat the combination of a new all time high just before a potentially weak January seems to be a match made in heaven.
The only fly in this ointment is the thin trading in the options. There are no leaps and future months don't even have put strikes near the current index level.
I am going to take the trade anyway and hope that new strikes are added before we get an entry. If not we will play what the dealer gives us.
I add EXPD as a put candidate for those who don't want to play in the thin DTX market.
I am not going to use insurance on this play as options are expensive. We are going to roll the dice and take our chances. If this is too risky for you please take the EXPD play instead. The difference between the two is a potentially large index move of 40+ points compared to a 10-point move in EXPD. Both could be very profitable.
We could have a new transport high next week but anyone that can do basic math should be very afraid of buying at the top ahead of January given the history for the last five years. I toyed with putting in a breakout/breakdown entry scheme but with the spike last week I was afraid it would collapse before we could get a decent entry. Option premiums could accelerate quickly.
This will be a hard entry for record keeping purposes at $426 but I strongly advise everyone to wait for weakness if we open with a spike on Tuesday. I would love to see a continued run to $450 on short covering into year-end.
We could easily see a dip to $370 over the next 90 days so buying a March put option at $400 is not unreasonable despite the index trading at $426 today. Since the $400 strike is the highest put strike listed for March and June that would be your best entry if none show up on Tuesday. Hopefully the market maker will add some on Tuesday with a new spike on the Transports.
The alternate strike would be the Feb $420 put just out of the money. A -40 point drop in the index would be a fat premium if it occurred before expiration in February. It is definitely possible.
Personally I am probably going to trade both strikes and roll out to a higher March strike when/if they become available.
Entry $426 (12/27)
EXPD - $71.39 - Expeditors International ** Stopped $71 **
I hated to see EXPD stop out at $71. The spike on Friday hit $72.72 but that is exactly to the resistance high set last November. If we get any market weakness I would not hesitate to enter EXPD again at this level. Earnings should be any day but there is no date posted. Once earnings have passed I would personally look to short any bounce.
EXPD is another way to play the anticipated roll over of the transportation sector. Unlike the DTX the options are liquid and cheap. EXPD spiked higher with the sector from $55 to over $72 on very little change in fundamentals. As you can see on the chart the spike is very unsupported. On a shorter term chart EXPD failed to near its highs on last weeks transport bounce and looks very likely to give back a majority of its gains should the transports in general suffer another January disaster.
This is not a negative indication of EXPD in general rather than just another way to play the potential transport weakness.
Expeditors International of Washington, Inc. (Expeditors International) is engaged in the business of providing global logistics services. The Company offers its customers a seamless international network supporting the movement and strategic positioning of goods. Its services include the consolidation or forwarding of air and ocean freight. In each United States office and in many overseas offices, the Company acts as a customs broker. It also provides additional services, including distribution management, vendor consolidation, cargo insurance, purchase order management and customized logistics information.
No insurance due to cheap options
Entry $69.54 (12/27)
VLO - $60.04 Valero ** No Stop **
VLO is holding at resistance at $61 but I am anticipating a decline in oil prices as the spring demand slump appears. Earnings are Tuesday. (no time supplied) I looked at taking out an additional put that is closer than our March $45 for insurance. However, we are only up +$3.31 on the LEAP. I hate to spend our profit buying a $1.35 $57.50 put. I also hate to go into earnings unprotected. Valero had some refinery outages as a result of the hurricanes and could report some charges. They owe the government 1.5 mb of oil loaned to them after the storms.
This means our options include closing the position on Monday, buying insurance, setting a higher stop or selling a higher call to offset any potential loss.
If Valero does report strong earnings and raises guidance then they could soar like Suncore, adding +$6 last week after earnings. If they report charges they could drop $4 or more to support at $56. It is a tough call. I hate to sell the call because of the chance for a breakout on good news. I hate to close the position for the same reason. I hate to place a stop at say $56 because our $60 LEAP is right at the money and could lose -$2.50 on a drop to $56.
That leaves us with buying insurance. Rather than buy a new put outright I think we are better off selling a short term call and using the money to buy the put. I suspect any Valero gains will be less than $5 and the spring demand slump could take them back down to $52-$54. If we sell the March $65 call (+1.75) and buy the March $57.50 put ($2.40) we are out 65 cents. We can set a stop on the call that will be offset by any gains in the leap. Because the call is shorter duration than the LEAP the gains in the LEAP would be larger than the short term call. It gets complicated but I think it is the best option. I still believe VLO will be over $75 by year end, possibly back to $100. Therefore I want to stay in the position.
Sell March $65 Call VLO-CM currently $1.75 bid
The object of this exercise would be to capture any decline in VLO with the put which reduces our cost in the LEAP. Buying the call back at a lower level also reduces our cost in the Put.
We will adjust the position next week as necessary.
Valero Energy Corporation (Valero) owns and operates 18 refineries having a combined throughput capacity, including crude oil and other feedstocks, of approximately 3.3 million barrels per day. Valero produces environmentally clean refined products, such as reformulated gasoline (RFG), gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur diesel fuel and oxygenates (liquid hydrocarbon compounds containing oxygen). It also produces conventional gasoline, distillates, jet fuel, asphalt and petrochemicals. Valero markets branded and unbranded refined products on a wholesale basis in the United States and Canada through a bulk and rack marketing network. It sells refined products through a network of more than 4,700 retail and wholesale branded outlets in the United States, Canada and Aruba. Valero's retail operations include approximately 1,500 company-operated sites that sell transportation fuels and convenience store merchandise.
2007 $60 LEAP Call VHB-AL @ $6.60
Insurance Put: March $45 Put VLO-OI @ $1.20
Sell March $65 Call VLO-CM currently $1.75 bid
Entry $52.30 (12/16)
OSTK $24.58 - Overstock.com ** New Stop Loss $29 **
** Target $20 for a profit exit **
Nothing new from Overstock and no date has been published for their Q4 earnings. Despite the CEO's assurance that they want to set the gold standard for investor communication they are still showing the next earnings date as Oct-28th on their website. The last published communication in the press said sometime in late January or early February. This is hardly the gold standard for accuracy.
Because earnings could be any day now I lowered the stop on the play to $29. We still have a profit target of $20 but I do not want to give back all the profits if we get a sudden surprise. Anything can happen with OSTK and it usually does. Motley Fool publishes something about twice a week regarding OSTK as being a member of their rule breaker portfolio. This is obviously an attempt to provide support for the stock because there is no other reason to mention it so often in their publications.
The CEO Patrick Byrne did decline a bonus for 2005 last week but all the rest of the officers took home $250,000 each despite lackluster performance and continued losses. The Overstock model may never be profitable according to several institutional analysts but it is profitable for the officers who also were granted additional stock options. The stock price fell on the news despite a rally in the markets.
Probably the worst managed retail site on the Internet. The President, Patrick Byrne, blamed the poor performance of his stock on an evil "Sith Lord." (A Star Wars Character) Patrick continually ranks in the top five worst performing executives of a public company as rated by the Motley Fool. His latest claim to poor stock performance is the possible existence of "millions of counterfeit shares of OSTK trading on the Nasdaq." I am not kidding. He blames the SEC with being in collusion with the Nasdaq for refusing to disclose the number of counterfeit shares in the system. He warned "shareholders that their only prophylactic against hedge fund counterfeiting was to obtain the actual certificates from your broker and store them in a safe place." This would of course prohibit your shares from being traded. This was in response to a "Get Shorty" article in the WSJ.
Overstock has filed suit against several research firms claiming a conspiracy to drive its stock price down. Patrick claims research firm Gradient Analytics and Rocker Partners were at the center of a vast conspiracy aligned against Overstock. He warned that the criticism of Overstock.com will not go unpunished.
Patrick was forced to give up his role as Chairman in October with his father John Byrne taking back control. Patrick remains the president but that has not diminished his wild accusations.
The company has a good business model but has failed to execute on so many levels that it should be criminal. They have the worst customer service of any E-Commerce site I have every visited. I have made several purchases in the past from OSTK and all but one were botched terribly. The products come in an unlabeled box with no return address label and no invoice. You can't return them without some serious effort. Consumers will not put up with this when other companies like Amazon.com, NewEgg.com and Ecost.com are models for the industry.
Sales at OSTK have slowed and operating expenses are growing faster than revenue and marketing costs nearly doubled in Q3. Cost of acquisition for new customers rose +30% over the prior quarter. This is a signal that competition is winning the battle and prior customers are not returning. OSTK has a huge debt load and slowing sales will not help. Morningstar gives them a D+ for financial health and an F for profitability. Analysts are dropping estimates for the stock into the high $20 range and well below current prices.
In August, Patrick Byrne held a conference call in which he basically said that everyone from hedge funds to journalists to regulators had all been scheming to destroy his company. He said the plan was being orchestrated by someone he identified only as the "Sith Lord." He really said that. Rob Plaza at Zachs Investment Research said when a CEO is putting the focus on things he can't control like short interest there could be a bigger problem he does not want you to see. He said an even bigger problem is when management blames regulators for stock manipulation you have a real problem.
The last really dumb statement, or was it, came from Patrick on Nov-10th. He said "I don't give stock advice but the average investor should probably steer clear of Overstock." That advice I will follow.
Overstock.com, Inc. is an online closeout retailer, offering discount, brand-name merchandise for sale primarily over the Internet. The Company's merchandise offerings include bed-and-bath goods, home decor, furniture, kitchenware, watches, jewelry, computers and electronics, sporting goods and apparel and designer accessories. It also sells books, magazines, compact discs (CDs), digital versatile discs (DVDs), videocassettes and video games (BMV). The Company also offers limited travel services. Overstock.com offers approximately 50,000 non-BMV products and approximately 500,000 BMV products in eight departments on its main Website, www.overstock.com. Overstock.com has a direct business in which it buys and takes possession of excess inventory for resale. It also has another worldstock Website, www.worldstock.com, through which artisans in the United States and around the world can sell their products.
June $35 Put QKT-RG @ $5.00
Entry $38.51 (12/12)
KKD $ 5.33 - Krispy Kreme Doughnuts ** Dropped $6.00 **
KKD was awarded a 90-day extension to file their financials by the NYSE. This was the end of the play for me. We initially entered it ahead of what was supposed to be their final appeal for a January delisting. They also won an extension from the secured creditors for another 90 days of grace. KKD has not filed financials since 2004. Had they been delisted the stock would have cratered and that was our target for an exit. The extension ended the play.
Trouble is mounting for KKD. They have not filed financials since November 2004 and they are probably going to miss the Dec-15th deadline imposed by creditors. They warned this would happen about 10 days ago. They have to restate financials for several years due to errors in accounting for expenses, loans and franchisee info.
The CEO Scott Livengood and other top executives were ousted earlier this year on allegations of financial misdealing and securities fraud. Suits are mounting from numerous groups, debtors, employees, franchisees and vendors over all types of non payment, fraud and failure to follow through with agreements.
Stephen Cooper, a turnaround specialist, took over the reins when the officers were evicted. So far the news has only gotten worse. Stores are closing rapidly including prior showplace stores and once leading producers. Cooper has worked on prior disasters including Polaroid, TWA, Enron and Boston Chicken. That list should give you a clue what is ahead for KKD.
Cooper said the chain cannot operate 4,000 square foot stores profitably and will try to reinvent itself as a smaller, leaner company. They are closing unproductive stores in a reasonable and rational fashion according to Cooper. He wants to focus on increasing sales of coffee and other beverages.
I have written about the similarity between KKD and Boston Chicken for several years and warned numerous times at much higher levels that KKD would end badly just like Boston Chicken. Now the Boston Chicken CEO is running KKD. Amazing prediction.
Yes, Boston Chicken was turned into a profitable entity once again. However it was done at the expense of shareholders. The common stock was cancelled the ownership of the stores was turned over to the debt holders. Boston Chicken wins, investors lose.
I believe that the NYSE will eventually tire of the endless deadlines for financials and will delist them. If that happens it will be the kiss of death for funds still holding the stock and hoping for a miracle return to the $105 levels of yesteryear.
Options are cheap and the KKD story is just waiting for Cooper to write the last chapter. KKD wins, shareholders lose.
Krispy Kreme Doughnuts, Inc. is a specialty retailer of doughnuts. It owns and franchises Krispy Kreme doughnut stores where the Company makes and sells over 20 varieties of doughnuts, including its Hot Original Glazed variety. Each of its traditional stores is a doughnut factory with the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Its sales channels consist of on-premises sales and off-premises sales. The Company has two complementary business units: its company and franchised stores, which Krispy Kreme refers to, collectively, as Store Operations and Krispy Kreme Manufacturing and Distribution (KKM&D). At February 1, 2004, there were 357 Krispy Kreme factory stores in operation, of which 338 are located in the United States. During the fiscal year ended February 1, 2004 (fiscal 2003), it acquired the remaining 33% interest in Golden Gate Doughnuts, LLC that it did not already own.
2007 $5.00 LEAP Put OKK-MA @ $1.35
Entry $6.01 (12/12)
HW - $34.92 - Headwaters ** No Stop **
HW suffered nearly a -$5 drop last week but recovered most of it after announcing some qualifications to earnings. Apparently some licensees have stopped production due to the volatility in the price of oil. Tax credits for alternative fuel can be dropped if the price of oil trades in a specific range for a given period of time. Without the credits the process is less profitable. HW said it would update its outlook in the Q2 earnings cycle. I am unsure what this means for HW but we do have a May $35 put to offset our $40 LEAP. With HW at $35 this weekend we have a couple months to see what happens with little or no risk. If we were not so well protected I would probably exit but without any material risk there is no reason to flee.
Headwaters (HW) has a compound annual growth rate of more than +120% mainly because it deals with the ash left over from burned coal. Coal generates a lot of ash and it is a problem the electric generating plants have to deal with when these cold fronts really suck up their coal supplies. Headwaters has three separate businesses from that ash. They have a business that buys and sells it for various purposes. Second they have produced a bonding agent to that makes it easy to transport without blowing out of the rail cars. They sell this to others for profit. Third they have a patented process for converting this ash into a synthetic fuel, which is licensed to plants that actually do the conversion.
They also make building materials and a cement substitute that uses this ash to make concrete more durable. Considering the thousands of tons of ash generated each week this appears to be a gold mine for Headwaters. When electric plants fight the tons of daily ash Headwaters is there to help and converts that ash back to dollars. This sounds too good to be true and I think that was the real problem with the decline from $46 in August to the $30 level in October. The ramp from IPO in April from $30 to $46 and decline back to $30 is complete. Those that got in on the good IPO story took their profits as energy prices declined. Now may be the time to jump back on the coal train with Headwaters rather than Peabody.
Headwaters Incorporated is a diversified company providing products, technologies and services to the energy, construction and home improvement industries. Headwaters conduct its business primarily through four business units, including Headwaters Resources, Headwaters Technology Innovation Group (HTI), Headwaters Construction Materials and Headwaters Technology Innovation Group. In September 2004, the Company acquired Tapco Holdings Inc., a manufacturer of building products and professional tools used in residential remodeling and construction. In June 2004, the Company acquired Eldorado Stone, LLC, a manufacturer of architectural manufactured stone based in San Marcos, California. Eldorado Stone is being purchased from Graham Partners, a middle-market private equity firm. Eldorado Stone will be integrated into Headwaters' coal-based construction materials operations.
Dec-27th Insurance Combo:
Entry $35.50 (11/22)
CHK - $32.30 Chesapeake Energy ** No Stop **
CHK insiders, the President and Chairman bought an additional $3.2 million if stock last week. This brings their two month total buys to over $82 million. CHK may have slipped from $34 back to $32 on weak gas prices but the insiders were waiting to pick up an additional 50,000 shares each at an average cost of $32.40. Nice to have insiders supporting their own stock.
Falling gas prices should continue to pressure CHK but we have little risk here. We reduced the cost of our position by selling the April $35 call.
Since we sold the April $35 call against our leap we should be perfectly happy to watch and wait as long as $35 is not broken. With our downside put in place there is little risk and gas prices will end 2006 higher than 2005. Be patient.
Keep that stop loss on the covered call at $34.95 just in case we get a sudden surprise.
A reader alerted me to the insider buying on CHK, (thanks Joe!) and I must say it is amazing. The Chairman and the President made a total of 18 market buys between Dec-14th and Jan-25th totaling over $82 million. That is an obscene amount of confidence and suggests to me that something is going on at CHK and their outlook is extremely positive. With a market cap of $11 billion they could be a takeover candidate made much more possible by being the third largest holder of gas reserved in the U.S.
Chesapeake Energy Corporation is an oil and natural gas exploration and production company engaged in the acquisition, exploration and development of properties for the production of crude oil and natural gas from underground reservoirs and the marketing of natural gas and oil for other working interest owners in properties that it operates. The Company's properties are located in Oklahoma, Texas, Arkansas, Louisiana, Kansas, Montana, Colorado, North Dakota and New Mexico. The proved oil and natural gas reserves as of December 31, 2004 were approximately 4.9 trillion cubic feet of gas equivalent (tcfe). At December 31, 2004, approximately 89% of the Company's proved reserves (by volume) were natural gas, and approximately 70% of its proved oil and natural gas reserves were located in the primary operating area, the Mid-Continent region of the United States, which includes Oklahoma, western Arkansas, southwestern Kansas and the Texas Panhandle.
2007 $35 LEAP VEC-AG @ $4.00
Covered Call 12/27:
Leaps Trader Watch List
No Hits Yet
Although we got a little dip in oil prices last week we did not fall far enough to trigger our waiting energy plays. Suncore announced blowout earnings and soared +$6 after dropping -$4 on the drop in oil. This should put them out of range temporarily.
Next week is a big week for energy earnings and we could see some volatility in individual issues. I continue to expect some decline in oil prices as the spring demand slump arrives. We need to be patient until that happens.
I am adding Affiliated Computer (ACS) to the watch list in hopes of getting a fill at a number in the middle of their Dutch auction range. I am convinced that there is still a buyer in the wings and the buyback of 45% of existing stock is somehow related.
We are nearing the end of the earnings season and the markets should begin to
weaken even if we do move higher on any Fed news. The economy is simply too weak
to support rising stock values for anything but energy stocks. We will be
patient and wait for them to come to us.
Current Watch List
DO - $80.79 - Diamond Offshore Drilling
Diamond Offshore Drilling Inc. engages principally in the contract drilling of offshore oil and gas wells. As of December 31, 2004, the Company had a fleet of 45 offshore rigs consisting of 30 semisubmersibles, 14 jack-ups and one drillship. Diamond offers a range of services worldwide in various markets, including the deep water, harsh environment, conventional semisubmersible and the jack-up market. Its principal markets for its offshore contract drilling services are the Gulf of Mexico, including the United States and offshore Mexico, Europe, principally the United Kingdom and Norway, South America, Africa and Australia/Southeast Asia. From time to time, its fleet operates in various other markets worldwide. Diamond provides offshore drilling services to a customer base that includes private and independent oil and gas companies and government-owned oil companies.
Breakdown target $72.00
RIG - $79.29 - Transocean Inc
Transocean Inc., formerly known as Sonat Offshore Drilling Inc., is an international provider of offshore contract drilling services for oil and gas wells, related equipment and work crews, primarily on a dayrate basis, to drill oil and gas wells. The Company operates with a particular focus on deepwater and harsh environment drilling services. The Company also provides additional services, including management of third-party well service activities. The Company's transocean drilling segment consists of drillships, semisubmersibles, jackups and other drilling rigs.
Breakdown target $70.00
COP - $65.10 - Conoco Phillips
ConocoPhillips is an integrated energy company. The Company's business is organized into six operating segments. The Exploration and Production segment primarily explores for, produces and markets crude oil, natural gas, and natural gas liquids on a worldwide basis. The Midstream segment gathers and processes natural gas produced by ConocoPhillips and others, and fractionates and markets natural gas liquids. The Refining and Marketing segment purchases, refines, markets and transports crude oil and petroleum products. The LUKOIL Investment segment consists of the Company's equity investment in LUKOIL, an international, integrated oil and gas company. The Chemicals segment manufactures and markets petrochemicals and plastics on a worldwide basis. The Emerging Businesses segment encompasses the development of new businesses, including new technologies related to natural gas conversion into clean fuels and related products, technology solutions, power generation and emerging technologies.
Breakdown target $60.00
SU - $78.72 - Suncor Energy
Suncor Energy Inc. (Suncor), formerly Suncor Inc., is a Canadian integrated energy company that explores for, acquires, develops, produces and markets crude oil and natural gas, transports and refines crude oil and markets petroleum and petrochemical products. Periodically, the Company also markets third-party petroleum products. Suncor also carries on energy trading activities focused principally on buying and selling futures contracts and other derivative instruments based on the commodities the Company produces. The Company has four principal operating business units: Oil Sands; Natural Gas; Energy Marketing and Refining, Canada, and Refining and Marketing, United States of America.
Breakdown target $68.00
ACS - $63.27 - Affiliated Computer Services
ACS has been the target of buyout talks for several months. Talks were dropped on the 17th and a week later ACS announces it is going to use DEBT to buy back 45% of the companies outstanding stock worth $3.5 billion. The buyback will be handled with a Dutch auction between $56 and $63 and end in early March.
This is too coincidental to be a random occurrence. I believe this is a way to reduce the outstanding shares at a fixed price to make them more attractive for a buyout. Reducing the number of shares allows the buyer to pay more per share for a smaller amount.
Affiliated Computer Services, Inc. provides business process and information technology (IT) outsourcing solutions to commercial and government clients. The Company's business process outsourcing services include administration, human resources and related consulting, finance and accounting, customer care and payment services. IT outsourcing services include mainframe, midrange, desktop, network, consulting and Web-hosting solutions, while systems integration services include application development and implementation, applications outsourcing, technical support and training, as well as network design and installation services. The Company provides technology-based services with a focus on transaction processing and program management services, such as child support payment processing, electronic toll collection, welfare and community services and traffic violations processing. In January 2005, the Company acquired Superior Consultant Holdings Corporation.
It is important to buy only the $60 calls since a buyout offer at say $67 would limit the $65 call to a $2 premium.
Breakdown target $59.00
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