Welcome to your Wednesday edition of my daily column. Before I get to the pick, I want to stress to you again that investing in deep-in-the-money calls is a strategy where patience is of the utmost importance.
Today I am once again going to focus on a company in the energy sector,
. McDermott's business is in offshore oil and gas construction, and the company operates in the U.S. and abroad.
As you may recall, in my column on April 2 on
I applauded that company's strong return on equity. The ROE provides a great measure for how well a company generates profits.
Though I called Walter's 100% ROE outstanding, McDermott's is well beyond outstanding, at an incredible 215%. This means that for each $1 of equity, McDermott generates $2.15 of profit.
McDermott's stock price took a hit toward the end of February, after the leveraged buyout of
. This was because a McDermott subsidiary, the Babcock & Wilcox Company, was notified to suspend performance on five of eight projects in Texas for TXU. McDermott's stock dropped nearly 15% in the following trading sessions. However, this negative movement was an overreaction by the market.
While this suspension has some effect on McDermott in the short term, its overall effect is minimal, as the projects were merely postponed for the time being, and should they be canceled in the future, the contract itself provides for restitution.
Keeping in line with our search for "cheap" companies, McDermott has a PEG (price/earnings-to-growth ratio) of 0.76. The PEG provides a measure of the oft-used P/E ratio to a company's growth. Generally, a PEG for fairly valued company falls between 1 and 2; however, at 0.76 McDermott's stock provides great value for a growing company with strong earnings.
In 2006, McDermott's profit rose to $1.81 per share, up from 59 cents a year ago, and it should continue to rise into the upcoming year. At its present price, the stock is trading with a P/E of 16.37 and a forward P/E of 12.78.
McDermott closed at $49.11 Tuesday, and I suggest buying 10 August 35s (MDRHG) at $13.90. In order to effectively capitalize on the deep-in-the-money calls strategy, I will place a GTC to sell at $1 above my initial cost immediately upon my purchase.
Of course, now that it's Wednesday, that means it's time for my Stat Book, which is below.
Always remember: Life is a journey, enjoy the ride!
At the time of publication, Dykstra was long MDR and WLT.
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.