The Dow gave us a nearly perfect entry on out short term DJX put position but after seeing the lack of reaction to the Greenspan and Intel news I am not sure if I should be excited of not. It is like a poker game where the first three cards look promising enough to make a bet but the fourth card changes your outlook entirely. Instead of increasing out bet on a Dow drop we are in a position where checking to the power is the right move. If we are going directional I would have thought this was the week with both the Greenspan and Intel event. Fortunately it was cheap at $1.55 and we have a tight stop at 106.50.
In my market wrap I mentioned that JP Morgan had singled out several energy stocks as ripe for a takeover. Those names were SRE, FTO, SUN, TLM, D, AYE and HOC. Of those names only D, Sun and AYE have leaps.
FTO looks like a rocket but October is the farthest month out and after three weeks of gains I would like to see it rest before making an entry.
SUN has leaps but they are grossly expensive as in the $17 range and higher for slightly out of the money. I hesitate to play those given the current build up in expectations.
Dominion has leaps out to Jan-2008 and after the big drop in early May they are reasonable. I don't like Dominion as an energy play as it is mostly a power company. It does have six trillion CF of gas assets and 7900 miles of pipelines but nothing to get excited about.
AYE is also a power company and one that burns about 18 million tons of coal annually. While their fuel expense may be less than a gas fired utility they do have about a 250 year supply of fuel. Gas plants could runs out of gas over the next ten years. Still, power plants are not exciting investments for me.
The SRE chart shows an upward pattern but one that is moving very slowly and showing no life.
HOC, Holly Corporation, is a petroleum refiner with a capacity of 110,000 bbls per day. They make light fuels like gasoline, diesel and jet fuel. They would make an attractive target for acquisition but they are too small to be attractive to the bigger firms.
TLM, Talisman Energy is by far the best target in my opinion. They are projecting nearly 500,000 bpd of production for the rest of the year and are active drillers. Many of their active assets are in Southeast Asia and that makes them a prime target for China Oil and its acquisition program. The company is producing about $1B in cash flow per quarter with about a 25% margin with production output increasing.
TLM has no leaps but the stock is cheap at $37 and call options for Jan-06 are $5 ITM and $2.95 OTM. I would jump on the Jan-$40 calls TLM-AH for $2.95. As fast as the stock is rising it could be $40 by the end of the week.
I did not add any new leap candidates this week but I believe the Talisman info is as good as it gets. Since there are no leaps I am not making them an official play but rest assured I think it is a strong opportunity.
On our watch list EBAY has drifted back to just over $36 and coming very close to our $34 target price.
CCU continues to wander and I will remove it next week if it does not go directional.
Current Watch List
EBAY - $36.61 Ebay Inc
CCU - $30.52 Clear Channel Communications
** Breakdown Target $28.00 **
Radio is changing with the advent of satellite and conventional AM/FM is fighting an uphill battle.
No insurance call - Stop at $35.00
EBAY - $36.61 EBAY Inc
** Breakdown Target $34.00 **
If we get continued dip I would be happy with an entry at $34.
Insurance put - OCT $30 PUT XBA-VF currently $1.40