NEW DIRECTIONAL PUT PLAYS
The Greenbrier Companies - GBX - close: 43.74 change: -1.26
Stop Loss: 47.05
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 940 thousand
Entry on December -- at $---.--
Listed on December 15, 2014
Time Frame: 3 to 6 weeks
New Positions: Yes, see below
Why We Like It:
Railroad-related stocks have seen a dramatic shift thanks to the sell-off in crude oil.
GBX is in the services sector. The company manufacturers railroad freight cars and ocean-going barges. They also refurbish freight railroad cars. New rules by the White House on railroad tanker cars that carry crude oil should mean strong business for GBX as companies are forced to either buy new cars or refurbish old ones to meet the new requirements.
The last couple of earnings reports from GBX have been bullish. They have strong revenue growth. Management raised their 2015 earnings guidance with their last report back in October. GBX has a huge backlog. Yet none of this seems to matter at the moment. The market is transfixed on the death spiral in crude oil prices.
How does crude oil impact the railroad stocks?
The shale oil revolution in the U.S. has been a major boon for the railroads. A lot of the shale oil drilling has taken place in regions with limited or no pipelines available to move the oil to be refined. That has boosted huge demand to transport oil by rail. Forbes noted that back in 2008 there were only 9,500 car loads of oil shipped by train. Yet by 2013 that has blossomed to 407,761 carloads. The first six months of 2014 saw 229,800 carloads of oil shipped by train.
Unfortunate, OPEC, mainly the Saudis, have declared war on all other oil producers, including the U.S. shale oil industry. When OPEC met on Thanksgiving they decided to not cut production knowing full well it would drive the price of oil lower. The very next day shares of GBX plunged.
Analysts have estimated that the average price to produce U.S. shale oil is in the $70-80 per barrel range. Today WTI crude oil is at $55.69 a barrel. E&P companies are not going to produce oil at a loss. That's going to cut back demand to transport oil by rail. However, it's not just oil transports the rail companies are missing out on. If the U.S. energy sector cuts back on shale oil drilling it will also reduce the need to move tons of fracking sand and metal pipes to drill all of those wells. If that wasn't bad enough the depressed oil prices mean cheaper gas and that makes trucking companies more of a competitor to normal transportation of goods.
GBX is not a railroad. They are a derivative trade on the rails and seem to be a lot more volatile. Right now the momentum is lower. GBX has spent the last few days trying to hold support at $45.00 and it has failed. The $40.00 mark might be round-number support but the next support level looks like it's closer to $37.00. The point & figure chart is forecasting at $24.00 target.
Tonight we are suggesting a trigger to open bearish positions at $43.25. We'll try and limit our risk with a stop loss at $47.05, which is just above today's high. That's a relatively wide stop loss. I do consider this a more aggressive, higher-risk trade due to the volatility. The most recent data listed short interest at 27% of the small 23.3 million share float and that raises the risk of a short squeeze (more volatility).
Consider using small positions to limit your risk.
Keep in mind that this could be a short-term three or four week trade. GBX will most likely report its Q4 earnings in the early to mid January and we'll plan on exiting prior to the report.
Trigger @ $43.25 *small positions*
- Suggested Positions -
Buy the JAN $40 PUT (GBX150117P40) current ask $2.00
Option Format: symbol-year-month-day-call-strike