FLR: Building the Case

There is an old stock market adage that says that we should never fall in love with any stock because that stock can break your heart. However, there are Wall Street stock marriages, those between an investor and a stock, that manage to buck that adage as a golden anniversary couple bucks the divorce odds today. Such a stock for me is Fluor (FLR).

Headquartered in Irving, Texas, FLR has been in business for 100 years as of 2012. The company is considered to be in the sector known as industrial goods/heavy construction. Using my K.I.S.S. approach to what FLR does, I simply think of it as an engineering company that also builds for its customers what it designs for the customers. It employs over 39,000 full time workers, so you can safely make the mental leap that FLR does what it does rather well.

In fact, FLR does what it does so well that its balance sheet is about as good as it gets. That balance sheet shows FLR to have a net cash position (cash minus total debt) of almost $2 billion. With a modest float of 168 million shares, that net cash position is equal to almost $12 per share. Thus when analyzing the price earnings ratio of FLR, I have to subtract that $12 per share from the $53.50 FLR is trading at now in order to get a more fair analysis of how well FLR is growing its earnings.

In a Wall Street Journal article on October 12 it was reported that FLR has an order backlog valued at $40 billion. Thus, that FLR cash position will be growing for the foreseeable future.

Technically I like FLR over the next several months. But with the proliferation of what seems to be everyone now becoming a "market timer" and the market being short-term overbought, I want to take advantage of this situation and build that sentiment into an options strategy for FLR.

Before we get into the trade, let's take a look at the chart and fundamentals with Jill and Scott:

Consider a bullishly biased calendar diagonal put spread in FLR. This trade is medium in risk because that risk is totally controlled. One big note of caution: if taking this trade, you must be prepared to accept the potential for FLR to be put to you. The capital required for this trade could be rather large should the shorted put become an exercise situation.

This trade is high in reward potential because the position could become one that I label as being morphed into a synthetic call (long stock and long put). Such would be the case if the shorted put becomes an exercised put into long stock.

Trades: Sell to open 3 FLR April 52.5 puts at $3.50 and buy to open 3 FLR July 47.5 puts for $3.30.

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At the time of publication, Jill Malandrino, Skip Raschke and Scott Redler held no positions in the stocks or issues mentioned.

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