Friday, 1 June 2007

Trade Number One - Long APA, Short ATI

OK, welcome to the A-Z of trading. Here I am looking to capture stock outperformance through a balanced long-short portfolio of 26 longs and 26 shorts, one for each letter of the alphabet (hey it seemed a decent way to force me to always have a position and to look across the entire market for ideas).

First trade:
Long APA (Apache Corp), Short ATI (Allegheny Technologies).

APA trading @ $81.90 with a P/E of 11.5, and a forward P/E of 10, so first off, not expensive. It is "an energy company, engages in the exploration, development, and production of crude oil, natural gas, and natural gas liquids" so a hot sector just now, and the company has interests across the world including Gulf of Mexico, Canada, UK, Australia and more. With a $27bn market cap, it's large but not too large for an energy company, and stock performance has not been great the last few years, and is just in the last couple of weeks hitting all-time highs after popping through the highs of late 2005, so perhaps a chance for it to take off from here.

ATI, trading at 116.16, has an $11.8bn market cap, a P/E of 18, and forward P/E of 13.5, so again not expensive. It "engages in the production and sale of specialty metals worldwide. It operates in three segments: High Performance Metals, Flat-Rolled Products, and Engineered Products". Now, I'm a believer in the US recession, and Steel companies are typically one of the worst performing sectors during recessions (indeed, ATI was below $3 a share in March 2003, as the US was exiting the last recession, although I don't know why as I've not looked at this stock until recently). With high raw material prices, and a weakening US economy, maybe this is one to be short.

I don't particularly know either of these companies, so any comments appreciated. Also, any thoughts on which B's to be long or short appreciated! First thoughts from me are to look at BKC (Burger King) for a long and BBY (Best Buy) for a short...

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Addendum: Other "A's" I was looking at were AAPL (short), ACF, AKAM (short), AMAT (long), AMD (long), AMGN (long), AMZN, and APPB (short).

2 comments:

traderboy said...

Haven't had the chance to pull the trigger on the B's yet...nothing overly stands out.

Stocks I have my eye on are:
BA, BAC, BBY, BC, BIIB, BJS, BKC, BMY, BNI, BSC, BTU, BUD.

Still think I'll go with BKC (Burger King), haven't particularly studied the stock, but a market cap of just $3.5bn strikes me as low for a company as large as Burger King, with an international franchise and the potential to grow into something as big as McDonald's, this could trade at multiples of the current price. P/E of 35, forward P/E of ~20. So not expensive for a growing company.

Also on the long side, BUD looks like a solid company with solid earnings, and again international diversification can only help it. Not screaming cheap unless you believe in its growth, P/E of ~20 and a forward P/E of 17.4.

A couple of the biotech's look interesting, both BMY and BIIB, although recent stock run-up makes me want to wait for a better entry, and financials again stick out for low P/E's (BAC 10.8, BSC 10.3) and a high dividend yield for BAC (4.40%), although am not keen on playing these from the long side going into a falling housing market, high mortgage delinquencies and potentially peak earnings at the investment banks(although I've been thinking that for years!).

As for shorts, I keep thinking Best Buy (BBY) is almost too obvious...$23bn market cap, 17.3 P/E, and a dividend yield of just 0.80%. Couple all these with a slowing US economy, a possible slowdown ahead in consumer spending, and continued pressure from the internet and Walmart, I think this stock looks like it needs to drop 10-20% from current levels. But today I was put off by a couple of stories, one mentioning that it was going to team with Carphone Warehouse from the UK to start selling cellphones from there stores, and also an expansion into India. That's the type of stuff the stockmarket usually likes.

Any thoughts, please add to this section! Feel free to comment on any stock, I am up for trading anything whilst building the portfolio, but any long that goes on must be accompanied by a short position in something else.

Amaris said...

Good for people to know.