Oil & Shipping: A Powerful Combo in a Weak Market

Add OSG January 2009 Calls

PLAY: Buy the OSG January 95 Calls (OSG AS) at market, good for the week. Place a protective stop limit at $2.70 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

Dear Bottarelli Research Member,

As you can see from the Dow chart below, the Blue Chips (on an intra-day basis) have officially lost over 1,000 points in just over one calendar month. This is quite a pullback, and it severely puts any talk of a recovery in doubt.

This same pattern can also be seen on the NASDAQ and the S&P 500. In fact, all three major market averages are down around -9% on the year, making for a very difficult environment for recreational “buy and hold” investors. But that’s why we trade options.

After all, by identifying the market’s specific pockets of strength, we can successfully ride the upside momentum on those companies that are able to withstand the weak market environment and continue pushing higher. This week’s 50% return on FDG is a good example of this methodology in action — and I’m sure we’ll see continued returns like this in our other LEAPS positions.

So this week, we’ll continue our profitable strategy of adding upside calls on the companies that I feel will continue appreciating for the rest of the 2008 calendar year. Today’s newest candidate comes in the form of Overseas Shipholding Group (OSG – NYSE).

As a simple summary statement, OSG is one of the largest crude-oil and refined-petroleum product shippers in the world. If you’ve followed my research alerts for a while, then you know that I’m quite bullish on shipping stocks — both U.S.-based railroads like Union Pacific (UNP – NYSE) and dry bulk shippers like Dryships (DRYS –NASDAQ) and Excel Maritime (EXM – NYSE). But when it comes to OSG, this company offers you a wonderful combination of two powerful sectors, oil and shipping. And best of all, OSG combines both sectors into one fluent business model.

You see, Overseas Shipholding Group owns and operates a fleet of 112 oceangoing vessels with total load capacity of 12.2 million deadweight tons and 432,400 cubic meters. 93 of their 112 vessels operate in the international markets, making them a true global play immune to an extended U.S. recession. Considering that their customers include both independent and state-owned oil companies, oil traders, and U.S. and international government entities, the demand for their shipping services looks as constant and consistent as you can get.

Now, oil shipping is one thing. But what I really like about OSG is that they’re currently diversifying their business model by moving into liquefied natural gas (LNG) and compressed natural gas (CNG). In fact, not many investors realize this, but OSG’s Q-Flex carriers are arguably the most sophisticated LNG vessels in the world.

Each ship can transport 216,000 cubic meters of LNG, which is 40% more than the conventional LNG vessels in service today.

Not only that, but OSG’s new class of ships are powered by low-emission and electronically controlled diesel engines (compared with steam propulsion that fuels older LNG vessels). This means OSG’s carriers have significantly lower energy requirements than any other vessels in service today.

Since natural gas is one of the cleanest and most abundant fossil fuels in the world, it’s easy to see why global demand will remain quite strong. In fact, with crude oil being pumped to capacity, energy costs climbing higher across the globe, and the world’s energy demand rapidly increasing, natural gas is quickly emerging as a major commodity in the worldwide energy supply chain. And no wonder. LNG is a clean energy source for major markets such as the United States, Asia, and Europe. And OSG has their sights set on becoming the premier shipper of LNG on a global scale.

And if that weren’t enough, OSG’s management is doing everything you can possibly ask for as an investor. On Monday June 9^th, for example, Overseas Shipholding Group raised their dividend by 40% and announced a $250 million share buy-back. Both of these events are extremely bullish. In fact, this new share buy-back comes on the heels of an earlier buy-back plan where OSG bought 280,000 shares at an average price of $77.48. All told, OSG has purchased 9.3 million shares, worth over $614 million. This represents 23.46% of the total shares outstanding, giving the stock a major floor right under the $80.00 level.

According to CEO Morten Arntzen, these actions “reflect our confidence in the ability of our businesses to generate strong levels of cash flow into the future. It also demonstrates our continued commitment to capital discipline and shareholder value creation.”

I must admit, it’s quite easy for every CEO in America to make a boiler-plate statement like this. But it’s an entirely different thing to fully back up these statement with a major share buy-back and a 40% dividend increase, and that’s exactly what OSG did. To me, the $100.00 level looks well within reach.

From a valuation aspect, the story gets even better. You see, OSG’s quarterly revenue growth (year over year) currently stands at 49.20%, easily blowing away the industry average of 13.60%. But amazingly, shares of OSG currently carry a P/E ratio of 11.65, which is far below the industry average P/E ratio of 15.20.

In other words, OSG has one of the best quarterly revenue growth rates of any other company in its sector, yet it trades at a P/E ratio well underneath the industry average. This clearly tells you that OSG is undervalued. That’s probably why the company is buying back shares hand over fist! And today, I want us all to profit right alongside them. So on that note, here is your newest LEAPS play…

PLAY: Buy the OSG January 95 Calls (OSG AS) at market, good for the week. Place a protective stop limit at $2.70 and implement our scaled-selling technique to lock in portions of your profits as these calls achieve 50% returns (and greater).

UPDATES

Entergy ETR January 140 Calls (ODF AH): This past Wednesday, Senator John McCain called for the construction of 45 new nuclear reactors by 2030. McCain said that the 104 nuclear reactors currently operating around the country produce 20% of the nation’s annual electricity needs, and these reactors “spare the atmosphere from the equivalent of nearly all auto emissions in America. Yet we have not broken ground on a single nuclear plant in over thirty years.” This new public awareness of nuclear energy should offer a nice upside trigger for shares of ETR, so maintain your January 140 Calls.

America Movil January 2009 70 Calls (AMX AN): I’ve received some questions about this position, which we entered for $2.00 per contract. As you can see from the AMX chart below, the stock suffered a major $10.00 gap-down in late April, and our January 2009 LEAPS position carries the viewpoint that AMX will recover and fill this upside gap prior to January expiration. Thus far, the stock has yet to regain any upside momentum, but we certainly have time on our side. Therefore, this position remains a hold.

Fording Canadian Coal Trust September 90 Calls (FDG IR): By adhering to our “Scaled-Selling Technique,” we took half of our profits off the table when these calls triggered a 50% gain. A day later, the stock had fallen back down, but the up-trend remains solidity in place. Therefore, maintain the second half of your position.

Sincerely,