PAA: Nice chart, but few big players

Plains All American Pipeline L.P. (PAA) of Houston, Texas manages crude oil and natural gas -- liquified and otherwise -- from where it was got to where it is useful, with all that such an operation implies: Transportation, storage, terminalling, marketing, refining. There's a lot going on with this company. To top it off, the company has been on an aquistion tear the past couple of years.

PAA was the most bullish chart of 16 selected at random from 675 large-cap companies. I describe my screening methods in an essay, "10,000 Charts".

The company's stock has been on the rise since early October 2011, with two corrections, carrying the price from $54.90 to $77.86. The most recent leg up began Jan. 13 at $72.57.

The story for an energy company like PAA is elementary: The economy is recovering, expanding industries need more fossil-fuel energy, and PAA can provide it.

The chart hit blue-sky territory in December 2011, and since then has traded above all previous price levels.

So, good chart -- good story. and pretty good financials: The return on equity is 14%, and earnings have been on the rise from the third quarter of 2010.

Yet the price is dirt cheap -- 37 cents will buy $1 worth of sales, and the institutions are staying way. They own only 35% of the stock. And the company pays a relatively high dividend, yielding 5.29% at present. (Under the Warren Buffet theory of investing, retained dividends suggest a stronger company, and PAA is giving the money back to shareholders rather than using it to increase value.)

All of which is a great big caution sign for me. If the big guys aren't crazy about PAA, given its fine chart, then maybe I shouldn't be so crazy about it, either. They might -- whisper it -- actually know more than I do.

The company is liquid, trading on average 458,000 shares a day. The ex-dividend date is Wednesday, Feb. 1, and earnings will be announced Feb. 8 after the close.

The stock has a fine selection of options, with some strikes having four-figure open interest and all having reasonable bid/ask spreads. Implied volatility has been in the lower 20% or upper 10% range since mid-December 2011, suggesting the position is best played as long options or as shares.

Decision for my account: If earnings weren't so close, then I would open a bull position. Even with earnings close, if the warning flags weren't so obvious, then I would open a position. But the combination of earnings just around the corner and the warning flags -- low price to sales, low institutional ownership, high dividend -- make me take pause. So, no trade today. I'll take another look on Feb. 9.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.