Update 6/7/2013: PSX gave an exit signal on June 5 and I closed the position on June 7. The share price at the exit was down 0.7% from the initial entry price. My overall basis produced a 1.4% loss on the share price. The vertical credit spreads I used as a vehicle for this position produced a loss on risk of 2.2%.
Phillips 66 (PSX
) continued the uptrend that began from $28.75 a week after it went public in April 2012 as a spin-off from ConocoPhillips (COP
), triggering a bull signal as it pushed above its 20-day price channel boundary at $65.48.
Spin-off charts are hard to analyze. They have a history, but only in part, on the parent company's chart. It's hard to know how much credence to give a combined analysis.
But let's try.
PSX hit an all-time high of $70.52 on March 28, and then corrected down to $56.13 on April 18 before resuming its upward movement. The price remains 7.1% below the all-time high, and it will take a push above that level to fully confirm that the uptrend is in force.
The parent company, COP, hit a swing high of $64.78 in the spring of 2011, then declined down to a low of $41.63 in the fall of 2011.
At the time that PSX was spun off COP was trading at $54.93, and PSX opened at $33.74. Applying simple PSX percentages to the COP price gives a COP equivalent to the PSX peak of $115.
Another way to look at it, using the company's figures for calculating a basis, is to consider COP to account for 77.09% of the fair-market value and PSX for 22.91%. That would put the PSX all-time high at a pre-spinoff equivalent of $301.81.
So I can say with a degree of confidence that PSX has in fact exceeded the equivalent of the combined company's all-time high, $78.94, attained by COP in June 2008 and is therefore definitely in a true uptrend.
This is PSX's 5th bull signal since the it began trading. The four completed signals split evenly at two profitable and two not. However, the winners yielded 25.2% on average, compared to a 6.7% average loss for the losers. The resulting 18.% win/loss yield spread is the largest among my prospects today,
erasing the presumed disadvantage of even odds.
Four other symbols from my first wave screening, listed in the weekend's "Monday's Prospects
", were confirmed in today's trading, allowing for further analysis. NBR's prior bull signals within the current trend tilted the odds slightly toward the loss side with a negative win/lose yield spread. ABBV, another spin off, and non-spinoffs FLR and TEX had trends that appeared less robust than PSX's.
Phillips 66 was created as a holding company for the parent company's downstream assets, what the petroleum industry calls refining, distributing and selling petrochemical products. In other words, its a large part of what happens to the stuff once it leaves the ground.
As with everything in the oil industry, it's complicated. But my short take on the PSX story would be that the economy is recovering, and that means more vehicle miles that need to be fueled as people return to work and therefore their commutes, as they bundle the family into the car for more distant vacations, and as trucks carry more stuff to stores to meet consumer demand.
Analysts, for whatever reason, are positive about PSX's prospects, coming down at 17% on the enthusiasm index.
And no wonder! Phillips 66 reports return on equity of 29%, with debt amounting to only 33% of equity. These are great numbers.
The company has earned a profit in each of the five quarters since the spin-off. The only year-ago comparable possible is this year's third quarter, which exceeded earnings of last year's 1st. Earnings have surprised to the upside in all five quarters.
Institutions own 68% of shares, and the price is bargain-basement. It takes only 23 cents in shares to control a dollar in sales. Stock prices are usually low for a reason. I don't know why in the case of PSX and won't speculate.
PSX on average trades 4.7 million shares per day and has a moderately wide selection of option strike prices with open interest running to four figures. The front-month, at-the-money bid/as spread is 3.5%, on the lowish side.
Implied volatility stands at 33%, near the mid-point of the six-month range. It has been falling fairly steadily since mid-April.
Options are pricing in confidence that 68.2% of trades will fall between $59.64 and $72.20 over the next month, for a potential gain or loss of 9.5%, and between $62.90 and $68.94 over the next week.
Puts are trading at their five-day average volume, and calls are cold, at 44% of volume.
Today's fair-price zone on the 30-minute chart runs from $65.58 to $66.47, encompassing 68.2% of transactions surrounding the most-traded price, $66.31. PSX opened below the zone and stair-stepped higher in the first three hours of trading to a point above the zone, but has fallen to the most-traded price level in the last hour, with 2-1/2 hours to go before the closing bell.
Phillips 66 next publishes earnings on July 31. The stock goes ex-dividend in August for a quarterly payout yielding 1.89% annualized at current prices.
Decision for my account: There's much to like about PSX: Good chart, excellent financials, fairly happy analysts. The low price of the stock relative to sales is a bit worrisome, as is the short history. However, the large win/lose yield spread and the look of the trend overcame those concerns in my mind.
I've opened a bull position in PSX, structuring it as a vertical credit spread expiring in June, short the $65 put and long the $62.5 put. The position provides a 2.7% cushion between the entry price and the break-even point, and a potential maximum yield of 25.4%.
My trading rules can be read here
. And the classic Turtle Trading rules on which my rules are based can be read here
At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
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.