, I wrote, "Foster Wheeler May Be a Bargain", and that may prove to be the understatement of the quarter! A week later, after reporting a weaker-than-expected third quarter,
began a six-day rally of over 25%, to hit $29.49 on Veteran's Day. We originally sold the November 22 puts for $0.60, and you can imagine how I wish I would have been a bit more bold there. The company's numbers were underwhelming, but I think the market liked the new contracts the company was securing for the fourth quarter -- not to mention the value the stock represents as a key player in energy construction and engineering services.
After letting the November puts expire worthless, I wanted to look at the name again on a pull back toward $25.00. That never happened as FWLT consolidated below $30.00 for the rest of November and then ramped up another 15% in December to mark a new 52-week high last week. Yet the stock still trades at a very attractive forward valuation in the mid-teens versus competitor Fluor (FLR) - Get Report which trades above 20x forward earnings projections.
Another competitor, Jacobs Engineering (JEC) - Get Report, helped FWLT make that new high on Wednesday as JEC itself launched higher on news it was acquiring some Latin American and China-based process and construction assets of Norway's Aker. This move expands JEC's reach into metals and mining businesses and emerging markets. All of these companies have significant exposure to the energy industry, so even while crude oil marches toward $100.00 again, the cyclical nature of heavy infrastructure and capital expansion projects determines their fortunes.
But while FWLT may serve the needs of refiners, its margins are not subject to the same squeeze, benefiting from engineering projects in diverse industries -- like biopharma -- and markets around the globe. Here's a note from Zacks Investment Researchdated December 16:
"FWLT continues to be successful in booking contracts of varying types and sizes in key end-markets. The company's success in this regard is a reflection of its technical expertise, its long-term relationships with clients, and its selective approach in pursuit of new prospects where it believes it has significant differentiators. Longer-term, the company believes that world demand for electrical energy will continue to grow and that solid-fuel-fired steam generators will continue to fill a significant portion of this incremental generating capacity."
I don't know if FWLT has the institutional interest and support to get to $40.00 in the next quarter, but I think it will likely test the 2009 highs of $35.82. If we get above there, then $40.00 will come pretty quick. Right now, the stock looks over-extended from its ten-week moving average back down around $30.00 and will probably retrace toward $32.00 at least. I am more than willing to bet the stock stays above $30.00 for the next few months and I am definitely interested in selling somewhat longer-dated puts for income. Here's today's trades that you can consider individually, or as a three-fer:
Trades: Sell to open FWLT May 30 puts at $1.77, sell to open FWLT May 31 puts at $2.10 and sell to open FWLT May 32 puts at $2.46.
These prices are based on Thursday's closing bids with the stock at $34.43. If the stock opens lower this morning, or trades lower later in the week, you should do better. If you decide to do spread out the risk across different contracts as I did, you might as well scale into them separately on any pullback opportunities. That's what I plan to do this week.
At the time of publication, Kevin Cook held no positions in the stocks or issues mentioned.
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