On Tuesday, AAA announced that average nationwide gas prices have been above $3 per barrel for 1,000 consecutive days – the first time that milestone was passed.
What was once “pain at the pump” is now commonplace. We’re used to it.
This may not be good news when you fill up that SUV – but it could be helpful to your portfolio. Of all the oil and gas plays out there, though, ConocoPhillips is setting up for a short-term trade with the potential – on the options side – for a gain of roughly 33 percent.
BULLISH TECHNICALS
Looking at the charts, ConocoPhillips on Tuesday closed above its recent range that was confined at $69.42, but below resistance at $70.10. The stock is trading above the 50-Day Moving Average ($66.97), as well as the 200-Day Moving Average ($62.59). Combined with the 14-day RSI at 57.88, Tradespoon’s algorithmic indicators suggest a bullish view on COP.
SMART MOVES
To confirm those technical indicators, we view COP’s fundamentals as bullish as well. ConocoPhillips plans to dispose of its interests in businesses in Algeria and Nigeria and the Kashagan oilfield in the Caspian Sea. It said those deals are expected to close by the end of this year and should bring in about $9 billion. It expects total proceeds from selling businesses this year to be $10.5 billion.
CRUNCHING THE NUMBERS
COP’s trailing price-to-earnings ratio is at 11.63, below the industry average of 11.83 and below the S&P 500 average of 18.59. The company is also currently trading below the target P/E ratio of 15 that Tradespoon’s uses to scan opportunities. The stock is also currently trading below its intrinsic value of $87.08, suggesting that it could be as much as 25 percent undervalued at current levels.
Over the past five years, ConocoPhillips has shown positive earnings consistency. COP’s earnings per share over the last five years have decreased by 3.9 percent. The current quarter earnings in comparison to the same quarter last year have increased by 23 percent, which is above the required level of 15 percent.
HERE’S A DEBIT SPREAD PLAY
Technical and fundamental indicators both show a short-term bullish signals. From an options strategy, we recommend a debit spread between the October 2013 $70 and $72.50 calls. By buying the lower strike ($70) and selling the higher ($72.50), traders have a well-thought out risk/reward ratio with a potential loss of $0.75 – the net debit. We recommend that the price of this spread could exceed $0.95, at which point we would look to lock in profits. At most, traders are risking the initial investment – $0.75 per share.
