Buy Alert: June 17, 2014

| June 17, 2014

Buy Alert: June 17, 2014

 

Option Strategy:

Buy CenterPoint Energy (CNP) August 15, 2014 $25.00 calls for $0.70 or better.

 

Commodity Outlook: Energy

This may turn out to be a phenomenal Summer for energy prices…

As you’re likely aware, Iraq is literally falling apart again thanks to an upwelling of rebel violence. The unsettling news is pushing crude oil firmly over the $105 a barrel technical resistance area we talked about in last week’s update.

And that’s not all…

Natural gas is trading near multi-month highs at $4.71 mmBtu.

The most recent EIA gas inventory report came in below expectations. As you may know, this is a bullish sign for the commodity. If weekly inventories continue to disappoint, we may see a strong run to the $5 area in coming months.

Add it all up and you can only come to one conclusion…

The oil and gas industry is still a great place to make bullish bets!

However, we have to be selective. Plenty of energy names have made strong rallies over the past few weeks. As a result, many in the industry are reaching lofty valuations, which diminishes the odds of strong additional upside.

But today I’m going to show you a company that has yet to make a bullish run. However, Wall Street analysts believe shares are significantly undervalued.

Let’s get to it…

 

Resource Company: CenterPoint Energy (CNP)

CNP is a natural gas distributor servicing 3.3 million customers in Texas, Arkansas, Louisiana, Oklahoma, Mississippi, and Minnesota. The company also provides energy services to commercial, industrial, and utility customers in 21 states.

Here’s the deal…

Analysts at BMO Capital Markets just upgraded CNP to “outperform”. What’s more, they think the company’s shares should be trading at $43.00. With CNP currently trading at just over $24, that represents nearly 80% of upside in the stock!

Clearly, Wall Street is taking a liking to this company.

And that’s not all…

A well-heeled investor made a big options bet in CNP yesterday. Someone purchased 9,000 July $25 calls for $0.40 a contract. The total investment on these out-of-the-money calls is around $360,000.

Obviously, somebody with good information is betting CNP trades higher over the next few weeks!

In case you’re unaware, seeing big options activity like this is a great sign for a stock. And given the recent analyst upgrade and bullish industry activity, we’d be well served establishing a call position in CNP.

So here’s what we’ll do…

Let’s purchase the CNP August 15, 2014 $25.00 calls for $0.70 or better.

The current bid/ask spread for this contract is $0.45/$0.60.

Do not pay more than $0.70 per contract!

Our official entry price for performance tracking is $0.60. Your price may be higher or lower.

Exit Strategy:

CenterPoint Energy

Remember, we want CNP to trade higher. Our first profit target is at $28.00, while our second is at $35.00. Given the strong analyst upgrade and bullish options activity, these lofty profit targets will likely be achievable by August.

The risk control price for this trade is $23.45. If CNP trades below that level, conservative investors should consider closing this trade to conserve capital.

 

Category: Commodity Trading

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