11:30pm (EST)

1.  Market Summary

2.  Oasis Petroleum (OAS) – A Double Win          

3.  Gilead Sciences (GILD) – Dying Cash Cow or Hidden Gem?     

4.  Earnings  

5.  Weekly Wrap Portfolio Update  

6.  Week Ahead

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1. Market Summary

The market ended mixed last week with the Dow powering to new highs while Tech took a breather.  We said last Monday that we expected a slight pullback for the market and the economic and earnings news was both good and bad.  The one bit of good news going forward was that jobless claims fell and home sales rose but what was disappointing were the earnings results from some of the companies in the Financial sector.

The Dow added 49 points on Friday to finish at 11,871.  For the week, the index added 84 points, or 0.7%, as the bulls extended their winning streak to 8 straight.  The blue-chips made a run at our Dow 12,000 target and we still think there is a chance we break this level with the companies reporting earnings this week.  However, we are also watching support at 11,550-11,500 should there be a slight pullback.

The S&P 500 gained 3 points on Friday to close at 1,283 but fell 10 points, or 0.8%, for the week.  The index had its 6-week winning streak snapped and traded to a high of 1,296 but fell short of our 1,300 target once again.  We will be watching the 1,275-1,270 area as a further test of support and a break below 1,270 could spell 1,250.  Of course, we are still expecting a push to 1,300-1,325 but the bulls will need to start the week off strong.

The Nasdaq has its 2-week winning streak stopped and fell 15 points on Friday to close at 2,689.  We were a little disappointed the 2,700 level didn’t hold and we mentioned the index would have trouble with the 2,850 level but Tech struggled all week.  Our target back in October 2010 was Nasdaq 3,000 and we still feel this will be hit in 2011 but if the 2,500 level fails as support, we could be waiting a while longer.

We are hoping the bulls can grab back the momentum this week and we are looking for a strong finish to close January.  We are hoping last week’s “shakeout” was just that and we even called for it.  The problem though was Tech looked weak and the Financials didn’t impress although some did. 

Look for the bulls to climb a wall of worry but we are respectful of key support areas if the bears decide to come out of hibernation.

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2.  Oasis Petroleum (OAS) – A Double Win

Oasis Petroleum (OAS, $27.35, down $0.97) is like a duel play.  The stock will go up with the price of oil, which is projected to go up as the world economy recovers, pipeline disruptions in Alaska, and lower production coming from Gulf offshore drilling.  And the stock will also go up as hype in the Bakken continues.  All this combined with strong growth, attractive valuation, takeover speculation, and good technicals make Oasis Petroleum an ideal buy.

The Houston-based company, which drills primarily in the Williston Basin of Montana and North Dakota, just went public six months ago.  So far, the stock has been hot, rising 84% from its IPO price.  The company has approximately 292,000 net leasehold acres in the Williston Basin, of which approximately 85% are undeveloped.  As of December 31, 2009, the company’s estimated net proved reserves were 13.3 MMBoe (Million Barrels of Oil Equivalents).  With oil selling for $89 a barrel, that is $1.184 billion, a little less than half the company’s market cap of $2.52 billion.  If the rest of the company’s land holds an equivalent amount of BOE/acreage, the total value of the land would be $7.891 billion, over three times the market cap.                                                                              

A 2008 report from the United States Geologic Survey (USGS) estimated the Bakken Shale holds at least 4.3 billion barrels of oil and 1.8 trillion cubic feet of natural gas, classifying the Bakken and Three Forks formations as the largest continuous oil accumulation ever assessed by it in the contiguous United States.  But based on Continental Resources’ (CLR) drilling results, CLR estimates the Bakken holds 20 billion barrels of oil and the natural gas equivalent of 4 billion barrels of oil, or about 21.9 trillion cubic feet of natural gas.  Most of the wells yield between 90-95% oil and the rest natural gas.

For 2011, the company plans to spend $490 million growing production by approximately 130% from 2010 to 2011, down slightly from approximately 160% year- over-year production growth from 2009 to 2010.  The company is steadily growing its BOE/day.  E = Estimate

1Q2010

2Q2010

3Q2010

4Q2010 (E)

2010 (E)

3,295 BOE/day

4,461 BOE/day

5,507 BOE/day

7,400 BOE/day

5,166 BOE/day


1Q2011 (E)

2Q2011 (E)

3Q2011 (E)

4Q2011 (E)

2011 (E)

8,600 BOE/day

10,500 BOE/day

13,000 BOE/day

15,250 BOE/day

11,838 BOE/day

As of January 18, institutional investors owned 50,218,570 shares vs. 49,096,173 shares held three months ago, an increase of 2.29%.  Increasing institutional buying is a very positive long-term indicator, because institutions see a reason to buy.   The Put/Call ratio was 0.43, another bullish sign.  A Put/Call ratio less than one means there are more buyers than sellers.

Analysts have been for the majority bullish on the stock with only one downgrade.

Source:  Yahoo Finance

Notice the back-to-back buy ratings on January 12 by Wunderlich and January 13 by Dougherty & Company.  More upgrades may come as the company gets more institutional interest.

Below is a list comparing Petroleum to its competitors and the industry.  Statistics are from Yahoo Finance.  Numbers are highlighted for ease of viewing.


G%

year over year quarterly revenue growth (%)

P/B

price/book

tPE

trailing PE ratio

PEG

price/earnings/growth

fPE

forward PE ratio

R/S

revenue/share

P/S

price/sales

%

% short


 

Price

G%

tPE

fPE

P/S

P/B

PEG

R/S

%

OAS

$27.35

198.60

27.63

26.9

4.78

-6.29

$1.05

8.1

AXAS

$4.22

4.20

47.42

23.44

5.4

$0.81

7.2

BEXP

$25.77

132.90

87.95

25.77

23.2

5.45

1.20

$1.28

8.9

CLR

$59.53

41.40

38.56

25.75

11.5

8.19

1.38

$5.32

8.9

ENP

$21.68

4.40

29.86

16.55

5.3

2.52

19.40

$4.04

0.7

GEOI

$25.80

27.90

24.26

16.43

5.5

2.56

$4.83

4.0

KOG

$5.62

117.90

432.31

13.71

35.4

5.83

5.24

$0.20

14

NOG

$25.80

202.30

125.24

25.54

31.2

5.73

2.93

$0.91

8.6

OXY

$97.97

19.30

18.80

13.37

4.13

2.47

1.21

$23.35

1.4

SSN

$2.14

127.40

107.00

28.5

5.91

$0.10

0.5

TPLN

$7.67

242.30

767.00

960

2.51

$0.01

0.5

Industry

20.40

5.25

1.87

At first glance, the stock doesn’t look cheap when compared to competitors or the industry.  The stock is the only one out of its competitors that has a negative PEG.  However, this could easily soon become positive since the company earned $0.06/share in the third quarter.  The company also has the third highest year-over-year revenue growth among competitors.  And it has the fifth lowest P/B. 

And when comparing it to recent Bakken purchases, it seems fairly valued if not a little undervalued.

Bakken purchases:

Williams Corp.

$925 million

85,800 acres in N.D.

Hess Corp.

$1.05 billion

167,000 net acres from TRZ Energy

Enerplus Resources Fund

$456 million

46,500 net acres in N.D.

That is $10,780.89; $6,287.43; and $9,806.45 per acre for each company respectively, an average price of $8,958.25 per acre.  Taking the company’s 292,000 acres, that is a price of $2.616 billion, 3.8% higher than its close of $2.52 billion.

There is also always a possibility that the company could also become a takeover target by a larger oil company.  Majors have been quick to snap up natural gas and shale plays, following the December 2009 buyout of natural gas specialist XTO Energy by Exxon Mobil.  The buyout was totaled at $41 billion, a 25% premium.  But recently, buying has again started to pick up again.  In October 2010, China Offshore Drilling purchased assets from Chesapeake Energy for $1.1 billion.  Less than two months ago Chevron bought Atlas Energy in a $4.3 billion deal, a 35% premium.  Other deals in the space include Carl Ichan’s accumulation of a 5.8% stake in Chesapeake.  So there is no doubt that there is interest in the sector.  Perhaps, the Bakken’s oil and natural gas reserves will prove fruitful.

Lastly, the technicals don’t give a definite sell signal.  In fact, they are leaning more to a buy signal, as shown below.



As always, there is no guarantee in investing, but the odds strongly favor for OAS to go higher.

Options do trade on this stock so we may make it a cover call trade in a week or two but we want to see how shares trade this week.

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3.  Gilead Sciences (GILD) – Dying Cash Cow or Hidden Gem?

Gilead Sciences (GILD, $38.19, up $0.02) reports their 4Q earnings on Tuesday, January 25, after the closing bell.  Using earnings trends and technical analysis, it is likely that the world’s dominant biotech manufacturer of HIV and AIDs medications will beat expectations and could move higher.

Consensus: 

Earnings:  $0.94

Revenue:  $1.99 Billion

The chart below shows data provided from their earning press releases with earning estimates placed for the 4Q of FY2010.  Earnings per share are non-GAAP.

Revenue – Quarterly Results (in $Millions)

Earnings Per Share – Quarterly Results


2010

2009

2008


2010

2009

2008

1st Qrt

2,085.9

1,530.5

1,258.2

1st Qrt

$0.99

$0.66

$0.53

2nd Qrt

1,927.2

1,647.2

1,278.1

2nd Qrt

$0.85

$0.69

$0.48

3rd Qrt

1,937.7

1,801.4

1,371.3

3rd Qrt

    $0.90

$0.78

$0.55

4th Qrt

  1,990.0

2,032.4

1,248.2

4th Qrt

$0.94

$0.93

$0.63

The U.S. FDA does not currently have guidelines for the manufacture of generic biotech drugs.  So, U.S. sales of the company’s drugs won’t be hurt by generic competition.  This, however, is not the same outside the U.S.  The European Union has guidelines in place for generic biotech drugs.  Thus, worldwide sales will be hurt.  This will affect revenue, which is calculated by adding sales, royalty revenues, and contract and other revenues.

The chart below shows calculations for the growth from prior quarters with earning estimates placed for 4Q of FY2010.

Revenue – Quarterly Results (in $Millions) 

Earnings Per Share – Quarterly Results 


2010

2009

2008

 

2010

2009

2008

1st to 2nd

-158.7

116.7

19.9

1st to 2nd

-0.14

0.03

-0.05

2nd to 3rd

10.5

154.2

93.2

2nd to 3rd

0.05

0.09

0.07

3rd to 4th

52.3

231.0

-123.1

3rd to 4th

0.04

0.15

0.08

 Notice that 2010 earnings decreased when comparing the third and fourth quarters with the second to third quarters, while it increased the previous two years.  This may happen, but is unlikely, given that HIV drug use is not seasonal.  An increase in 2008 and 2009 would probably translate to 2010.

The chart below shows calculations for the growth from prior years with earning estimates placed for 4Q of FY2010.

Revenue – Quarterly Results (in $Millions) 

Earnings Per Share – Quarterly Results


2009 to 2010

2008 to 2009

 

2009 to 2010

2008 to 2009

1st Qrt

555.4 (36%)

272.3 (22%)

1st Qrt

0.33 (50%)

0.13 (25%)

2nd Qrt

280.0 (17%)

369.1 (29%)

2nd Qrt

0.16 (23%)

0.21 (44%)

3rd Qrt

136.3 (8%)

430.1 (31%)

3rd Qrt

0.12 (15%)

0.23 (42%)

4th Qrt

-42.4 (-2%)

784.2 (63%)

4th Qrt

0.01 (1%)

0.30 (48%)

The fourth quarter revenue from 2009 to 2010 is the only quarter that experienced a decrease.  Likewise, the percentage increase from 2009 to 2010 plunged to 1% in the fourth quarter while staying in double digits in the other quarters.  This seems a little low.  But to confirm this, we shall dig a little deeper.

Forbes just recently ranked GILD as the third most profitable growth company in the U.S.   With a whopping return on equity of 54%, it is hard to think that the company could have earnings so low.  And although 4 of its major drugs are losing patents soon, this won’t affect 4Q numbers.

From the technicals, one could say it is a buy, although the W%R gives a little warning signs.


Although the risks are present, the stock may be able to reward when it reports.

 

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4.  Earnings

The companies in BOLD, we are looking at as possible trades and we may list call and put options on them in our Daily Newsletter.  If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week.  (Quotes as of Friday’s close 1/21/11)

MONDAY:  American Express (AXP, $46.00, up $0.73), Amgen (AMGN, $56.97, down $0.34), Baxter International (BAX, $49.49, down $1.06), Corning (GLW, $19.33, down $0.05), CSX (CSX, $67.64, down $0.10), Green Mountain Coffee Roasters (GMCR, $34.47, up $0.36), Greenhill & Company (GHL, $80.58, down $0.48), Jacobs Engineering Group (JEC, $49.72, up $0.40), Kimberly-Clark (KMB, $64.28, down $0.26), McDonald’s  (MCD, $75.01, down $0.15), Raytheon (RTN, $52.15, down $0.22), Texas Instruments (TXN, $33.91, flat) and VMware (VMW, $90.66, up $1.35). 

TUESDAY:  AK Steel Holding (AKS, $14.10, down $0.21), Baidu (BIDU, $105.10, down $0.56), Dr. Reddy’s Laboratories  (RDY, $35.96, down $0.83), DuPont (DD, $48.35, up $0.23), EMC (EMC, $23.98, up $0.14), Gilead Sciences (GILD, $38.19, up $0.02), Harley-Davidson (HOG, $35.99, up $0.04),   Peabody Energy (BTU, $58.17, down $1.14), Sherwin-Williams (SHW, $82.29, up $0.40), Travelers (TRV, $55.00, up $0.12), United States Steel (X, $53.29, down $0.82), Verizon (VZ, $34.95, up $0.34) and Yahoo (YHOO, $15.97, down $0.26).  

WEDNESDAY:  Abbott Laboratories (ABT, $47.92, down $0.04), Citrix Systems (CTXS, $65.23, down $0.13), ConocoPhillips (COP, $67.66, up $0.45), E*Trade Financial (ETFC, $15.92, down $0.13), General Dynamics (GD, $72.97, down $0.48), Hess (HES, $78.65, down $0.79), Netflix (NFLX, $182.09, down $2.91), Piper Jaffray (PJC, $36.08, down $0.15), Qualcomm (QCOM, $51.24, down $0.10), Royal Caribbean Cruises  (RCL, $48.22, up $0.74), Starbucks (SBUX, $33.20, up $0.02), Textron (TXT, $26.63, up $0.58), Valero Energy (VLO, $24.13, up $0.05) and Xerox (XRX, $11.14, down $0.01).

THURSDAY:  Altria Group (MO, $24.09, up $0.05), Ariba (ARBA, $23.60, down $0.60), AT&T (T, $28.33, up $0.10), Briggs & Stratton (BGG, $20.51, down $0.24), Bristol-Myers Squibb (BMY, $26.06, up $0.23), Caterpillar (CAT, $92.75, down $0.86), Colgate-Palmolive (CL, $79.00, up $0.54), Eli Lilly (LLY, $34.76, up $0.01), JetBlue Airways (JBLU, $6.35, down $0.14), Lockheed Martin (LMT, $79.22, down $0.10), Microsoft (MSFT, $28.02, down $0.33), Nokia (NOK, $10.78, up $0.30), Potash (POT, $164.25, up $2.41), Procter & Gamble (PG, $65.91, up $0.11), Riverbed Technology (RVBD, $36.14, up $0.70), Stanley Black & Decker (SWK, $66.46, up $0.55), Time Warner Cable (TWC, $67.28, up $0.19) and Under Armour (UA, $53.25, down $0.84).  

FRIDAY:  American Electric Power (AEP, $36.44, down $0.03), Chevron (CVX, $93.78, 1.07), Dominion Resources (D, $45.35, down $0.02), Energen (EGN, $54.13, down $0.29), Honeywell (HON, $54.49, down $0.09), JB Hunt Transportation (JBHT, $41.13, up $0.18), Oshkosh )OSK, $36.09, down $0.22) and Rambus (RMBS, $20.55, down $0.20).

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5.  Weekly Wrap Portfolio Update (Closing prices as of 1/14/11)     

DryShips (DRYS, $5.00, down $0.05) (COVERED CALL)

January 2012 7.50 call (DRYS120121C00007500, $0.47, down $0.02)    

Entry Price:  $5.25 (1/03/11) sold January 2012 7.50 call @ $0.65

Exit Target: $8

Return: 9%

Stop Target: None

Action:  DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell.  The options opened at 69 cents so you should have gotten 65-70 cents for selling them.  This lowered the cost basis to $4.60.

If shares are over $7.50 a year from now, you would be “called away” and the trade would make nearly 70%.  We like the risk/reward factor with this trade.

 

Seattle Genetics (SGEN, $15.73, flat) (COVERED CALL)   

March 17.50 calls (SGEN110319C00017500, $0.60, flat)

Entry Price:  $15.50 (12/27/10) sold March 17.50 calls @ $0.90

Exit Target: $20

Return: 8%

Stop Target: None

Action:  Seattle Genetics opened at $15.80 and shares were at $15.50 at 10am on 12/27/10.  The March 17.50 call option could have been sold for 90 cents.  This lowered the cost basis to $14.60.  Continue to hold.  


Patriot Coal (PCX, $23.18, down $0.47) (COVERED CALL)

January 19 call (PCX110122C00019000, $4.55, down $0.30)      

Entry Price:  $17.80 (12/6/10) sold January 19 call @ $0.95

Exit Target: $20

Return: 13%

Stop Target: None

Action:  The trade is closed as shares were well above the strike price of $19.  The overall return was 13%. 

Patriot Coal opened at $17.51 and shares were at $17.80 around 10am on 12/6/10.  The January 19 call could have been sold for 95 cents.  This lowered the cost basis to $16.85. 


Dendreon (DNDN, $35.05, down $0.60) (COVERED CALL)

February 39 call (DNDN110219C00039000, $1.15, up $0.20)

Entry Price:  $41.96 (9/13/10) sold October 45 call @ $1.30, (11/11/10) sold December call @$1.75, (12/20/10) sold February 39 call @ $1.50

Exit Target: $45

Return: -6%

Stop Target: None

Action:  Dendreon opened at $41.96 and you could have sold the October 45 call option for $1.30 on 9/13/10.  This lowered the cost basis to $40.66.

On 11/11/10 we sold the December 40 call option for $1.75 which lowered our cost basis to $38.91.

On 12/20/10 we sold the February 39 call option for $1.50 which lowered our cost basis to $37.41.

If the stock gets “called away” from us by mid-February the trade will return 5% from when we first profiled it.

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6.  Week Ahead

There is no economic news on Monday for the market.

Tuesday, the Case-Shiller 20-city home price index for November and the Conference Board’s Consumer Confidence Index for January are due out. 

On Wednesday, the Commerce Department will report new home sales for December, but all eyes will be on the Federal Open Market Committee (FOMC).  The suit-and-ties will give us an update of its recent meeting and no one is really expecting the Fed to raise interest rates.  As usual, it will come down to what the Fed’s language is about the health of the economy and they will end by saying they will keep interest rates low for an “extended period.”  The one curve ball could be the news faces that are on the committee but expect much of the same jargon.

The Labor Department will update the market on Thursday with its weekly look at jobless claims, while the Commerce Department will report on durable goods orders for December. 

For Friday, the Commerce Department will announce gross domestic product (GDP) growth, the National Association of Realtors will publish its pending homes sales index for November and the University of Michigan checks in with their January consumer sentiment survey.