Wednesday, March 21, 2012

EC: Epic risks

Ecopetrol S.A. (EC), headquartered in Bogota, is engaged in the full range of oil and natural gas operations, mostly within its home country, Colombia. Owned by the government, it is the largest company in the country, with 5,048 miles of pipeline.

EC had the most bullish chart of 11 stocks added today to the Zacks top-buy list.

(I also a analyzed 16 charts selected at random from 675 large-cap stocks. MDY was the most bullish, but the charts were so poor on most of the issues that I've decided not to do a full analysis.)

EC's daily chart chart shows a steady rise from $41 on Nov. 28, 2011 up to $61.56 on March 13. The price moved into blue-sky territory in February, breaking out into record highs.

However, since the most recent highest high, the stock has pulled back in a classic downtrend: A low, a lower high of $61.16, and today's lower low of $58.91. At a minimum, it would take a close above $61.16, followed by a reversal above $58.91, before I would consider the uptrend to be back in operation.

Ecopetrol on the books is a growth stock, with return on equity of 34% and long-term debt amounting to only 15% of equity.

Despite Ecopetrol's great financials, the company comes with epic risks.

Institutional ownership is quite low, at under 2%. Perhaps that is due to concerns about the stability of the country's government, which has been engaged in a low-intensity civil war, sometimes with U.S. backing, since 1968 by some reckonings, and since 1948 by others.

The conflict has in part been political, and in part, commercial, as drug lords violently protect their trade.

That giant, glowing exclamation point floating above your screen is a warning. Ecopetrol has the risks common to the oil game -- administrative decisions made in Saudi Arabia and Russia can have outsize impact on the company's performance. Added to that, it has the domestic politic risk of nationalization, warfare against its infra-structure, and assassination of its key personnel.

There is also a history of corruption in Colombia, and who knows how that spills over into the price of Ecopetrol stock on its home exchange, the Bolsa de Valores de Colombia. The price on U.S. traded shares has been bid up to the point where it takes $3.92 in shares to control a dollar in sales. Go figure.

EC shares traded in the U.S.  have a bit less liquidity than I like. Average volume is 624,000 shares.

The stock's options inventory is sparse, but with triple-digit open interest clustered around the at-the-money level in the out-months. The bid/ask spreads are wide.

Decision for my account: I identified three risks associated with EC -- war, petrol-politics and corruption. That's too rich a brew for my account, so I'm passing on the trade. If I were to trade, it would be as shares, and I would wait at a minimum for a new higher high in the very near term, above $61.16.

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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