Tuesday, February 21, 2012

CBI: The skeleton of fossil fuel dependence

Chicago Bridge & Iron Co. N.V. (CBI) plans, buys for and builds projects for the oil and gas industry globally. Despite the name, it is headquartered, on paper at least, in The Hague, Netherlands, and and administers its worldwide business from Houston, Texas.

The company was in fact founded, in 1889, in Chicago to build bridges. But  in the intervening century-plus, it has transformed itself into a different sort of beast. Some examples of recent projects: A liquefied natural gas import terminal in Wales, a hydrogen generation plant in California, oil sands storage tanks in Alberta, storage facilities in the Middle East, and a liquefied natural gas terminal in Chile.

So CB&I's business is to build the infrastructure -- the skeleton -- that upholds our fossil fuel dependence, and that business, in turn, depends largely upon the demand for those fuels: More demand means more need to ports, processing and storage, and so more projects for CB&I.

CBI was the most bullish chart among 11 stocks added over the weekend to the Zacks top buys list. ENSG was the runner-up. FUN and RDY completed the final four.

The price of CBI today broke above the previous higher high, which had marked the start of a 5-day correction.

The most recent rise began in October 2011 at $23.88 and was marked by four corrections of varying degrees on its way to today's high (so far) of $46.00.

The all-time high for the company's stock was $63.50, set in January 2008. It then promptly sunk the next year to $4.64 in the depths of the Great Recession.

So at the micro-level, CBI is a classic breakout chart. At a broader level, it is a classic uptrend. And at a broader level still, it is a history of our era of tragic collapse and hopefjul renewal.

Certainly, it has been moving in line with the economic recovery and expectations for more recovery to come. I can't judge to what extent the rising price reflects expectations of a clash with Iran that would disrupt the flow of oil through the Straits of Hormuz and the send the price of a barrel of crude soaring.

Certainly, in its finances, CBI has been on a roll. The return on equity stands at 23%, and long-term debt is at rock bottom, equal to only 7% of equity. Institutions own 80% of the shares, yet the price stands at near parity to sales. It takes only $1.04 in shares to control a dollar's worth of sales.

CBI on average trades 730,000 shares a day and has an acceptable inventory of options. Open interest mainly runs to the three figures. The spreads are also low, running around 20 cents on the bid/ask spread.

Implied volatility stands at 37% -- about double that of the S&P 500. Yet, it is near the six-month low for CBI. That suggests to me that any trade on this stock should be long options or shares, rather than doing a spread for credit.

Earnings will next be published after the close next Thursday, Feb. 23. The stock goes ex-dividend on March 14 for a quarterly payout worth 0.44% a year.

Decision for my account: Attractive chart, attractive financials, attractive options -- CBI is an attractive stock. I bought calls today, with a strike price of $43. A cautious trader would wait until after the earnings announcement, but the breakout persuaded me to enter now, in the expectation of good earnings news,  rather than to wait. I'll find out Thursday if I guess right or wrong.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
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.

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