Dykstra: Good Nabors

A way to profit in the likely event this premier oil driller rebounds before mid-June.
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Drilling for a rebound in oil stocks should be a beautiful thing this week. But what if it's not

this week

? How about every week until we reach June? Even then, you will

still

have until June 16, which is the third Friday in June. Where am I going with this? To the bank!

Each week, I have been focusing on opportunities from deep in-the-money calls when

quality

stocks are oversold. The beauty of deep in-the-money calls is that they give you the ability to invest in potentially expensive stocks, with very little risk when compared with the price of the common stock. The leverage and flexibility allow you to capitalize on opportunities regardless of the direction the market appears to be heading: If the market is going down, we are buying; if it is going up, we are selling. This market is very choppy so I am selling on strength.

Despite my conservative nature, there are times when "drilling for oil" is worth the risk. After some extensive research, I have donned my work gloves, put my ear plugs in securely, and I will commence "drilling for some serious oil" this week.

Nabors Industries

(NBR) - Get Report

, one of the world's largest drilling contractors, is about as good as it gets. The company has nearly 600 land drilling rigs and more than 900 land workover and well-servicing rigs. Nabors Industries operates across the U.S. and in Africa, Canada, Central and South America, and in the Middle East. Its offshore equipment includes platform rigs, jack-ups, barge drilling rigs, and marine support vessels. Nabors also provides oil field hauling, maintenance, well logging, engineering, and construction services, and invests in oil and gas exploration.

Its balance sheet, and all of its key numbers (or at least what I consider key) are off the charts. Its P/E-to-growth ratio, based on its long-term (i.e., five year) expected earnings growth rate, is 0.20. That is such an awesome number, I was afraid to type it, thinking you might not believe me. Believe it, I checked 30 times.

For those unfamiliar with this metric (the rest of you can skip ahead), the P/E-to-growth, or PEG ratio, is a powerful valuation metric compiled by dividing the current price-to-earnings ratio by the expected growth rate in earnings per share over a given period (in this case we are using five years).

The three examples below are generally accepted standard:

More than 1.0 is poor;

less than 1.0 is good;

less than 0.5 is excellent.

Now, let's get to the good-till-canceled (GTC) order I am recommending: I want you to buy a June $60 (strike price) deep in-the-money call, with a (GTC) limit order, at $14.50. This is exactly where I bought the same deep in-the-money call on Friday.

On Friday shares bounced off a chart support around $72, and should trade up to quarterly pivots at $73.50 and $76.88. If shares weaken further, lower support is at the 200-day simple moving average at $66.91. Nabors has tested and held its 200-day moving average on the uptrend for more than a year, testing this moving average on Jan. 7, 2005, May 17 and Oct. 20.

Please, do not chase! We are stepping it up a little, meaning we are putting up more cash than normal, but for only $14,500 we are controlling 1,000 shares that would cost you $73,100 for the common stock. Bottom line: we are in the business of making money (period), and this is the definition of low risk/high reward.

Remember:

Life is a journey, enjoy the ride!

At the time of publication, Dykstra was long Nabors calls, although holdings can change at any time.

Nicknamed "Nails" for his tough style of play during his Major League Baseball career, Lenny Dykstra was an integral member of the powerful Mets of the mid-1980s, including the world champion 1986 squad, and the Phillies in the early 1990s.

Today, Dykstra manages his own stock portfolio and serves as president of several of his privately held companies, including car washes; a partnership with Castrol in "Team Dykstra" Quick Lube Centers; a state-of-the-art ConocoPhillips fueling facility; a real estate development company; and a new venture to develop several "I Sold It on eBay" stores throughout high-demographic areas of Southern California.