Tuesday, June 18, 2013

CLB: Bullish on oil field services

Update 7/25/2013: CLB moved below its 10-day price channel, signalling that my bull position should be closed. 

The price has previously moved below the channel once but quickly rose again above the signal level. In such instances, I keep the position alive but freeze the signal level at the higher price. In other words, for a bull position, I never move the level of a close signal any direction other than up.

CLB peaked on the third day after entry and immediately followed with a powerful intra-day decline. An earnings announcement produced a two-day upward bump before the decline resumed.

The position was structured as long shares. I closed for a loss of 3.6% on a position held for 37 days, or -35% annualized.

Core Laboratories N.V. (CLB), in breaking above its 55-day price channel, confirms that it has resumed a daily chart uptrend, having traced a low, a higher high, a higher low and, upon the breakout, a still higher high.


The move comes amid a weekly chart uptrend unbroken since the 2009 start of the post-recession recovery.

This is the third bull signal since CLB began its present leg up last November. The two completed signals split, one a success with a 24.6% profit over an 80-day lifespan, and the other a failure with a 1.1% loss over 23 days. The even odds are well compensated for by the huge yield spread.

Moving back a cycle on the chart, to the leg up that began in October 2011: The six completed bull signals also split, with a 10.2% profit on the successes and a 1.4% loss on the failures.

In selecting CLB, I was faced with a larger than usual field of possibilities. As noted in last night's post "Tuesday's Prospects", 13 symbols survived my initial screening, and this morning all confirmed their signals by trading beyond their price channels.

As always, when doing triage, I looked at the more liquid plays first. Four symbols have average volume of more than a million shares. FIO had poor follow through in trading this morning. It lacked "conviction", as the more poetic of the chart analysts say.

ABC's signal really wasn't a true breakout from a correction, and neither was SBGI's. Both might turn out to be good trades, but I would want to wait for a break above the daily-chart pre-correction high before trading.

MDVN had poor odds of success -- actually, it had no profitable breakouts in its current downtrend.

That left nine less liquid possibilities, all bull signals. To speed things along, I took a short cut: All but two symbols were rated neutral by Zacks, so I tossed them aside in favor of two that had bullish ratings: CLB and CPA. Of the two, CLB is the less liquid but has a 23.5% yield spread. CPA, although more liquid, has a yield spread of only 3.1%.

With that in mind, I chose to spend my time looking at CLB -- Core Laboratories.

Core Labs, headquartered in Amsterdam, Netherlands, provides core analysis and reservoir services to oil and natural gas drillers globally.

Oil field services are the hot spot in the energy business these days, as the majors outsource more of their operation to specialists. That backstory, while not important to my analysis, adds interest.

Analysts as a group aren't really on board with Zacks in assessling CLB's prospects. They come down to a 25% negative enthusiasm rating of the stock.

They must be closing their eyes when they read the financial reports. Core Labs reports return on equity of 105% (!) with debt on the high side, amounting to 128% of equity. With returns so high, of course, the company can stand higher debt than most.

Earnings have steadily increased, quarter by quarter, over the last eight quarters. Of the last q11 quarters, Core Labs has surprised to the upside 11 times and to the downside, once.

Institutions own 97% of shares, and the price has been bid up to a high level. It takes $6.82 to shares to control a dollar in sales.

Core on average trades 221,000 shares a day. It has an adquate selection of option strike prices, but double-digit open interest is too low for me to trade. Also, the bid/ask spread on up-front at-the-money calls is outrageous, at 27%.

If I play CLB, it will be as long shares, which removes the chance to leverage and hedge the position. That's not necessarily a bad thing. I like to mix up my holdings with both options and shares, such to increase the diversity of my trading ecosystem.

Open interest stands at 31%, near the middle of the six-month range. It has been swinging widely this month for a net sideways move.

Options are pricing in confidence that 68.2% of trades will fall between $139.56 and $166.54 over the next month, for a potential gain or loss of 8.8%, or between $146.57 and $159.53 over the next week.

Options are trading very actively today, with calls running 8.6 times their five-day average volume, and puts at 4.5% average volume.

The fair price zone on today's 30-day chart runs from $150.88 to $153.43, encompassing 68.2% of transactions surrounding the most-traded price, $152.80. The price began below the zone and has risen steadily ever since. It is trading just below the zone's upper boundary with 2-1/2 hours to go before the closing bell.

Core Labs next publishes earnings on July 16. The stock goes ex-dividend in July for a quarterly payout yielding 0.84% annualized at today's prices.

Decision for my account: I've opened a bull position in CLB, structuring it as long shares. 

Note that the average range for CLB is high, at 3.78. This is a bit extreme for the Turtle Trading position size adjusting for volatility. If a trader's base position is, for example, $1,000, then the adjusted size for CLB is $265, or less than two shares. (I calculate the base position size as 1% of total trading funds, so my example implies a not unsubstantial $100,000 account.)

See my essay "Position Sizing: The Big and the Small" for more on the subject.


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.

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