April 2017 Vol. 3 Issue 11
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High Probability Trades in a Volatile
Market
or four months, I complained that the low stock market volatility was making it hard to find the types of stock price set ups I like for 30 Day Dividends trades. Volatility started to return in March, and I could add one trade.
Recently, it seems like share prices are reversing direction pretty quickly and the different high-yield sectors I follow are diverging more from the S&P 500 type of corporate shares. For 30 Day Dividends trade recommendations, I look for dividend-driven share price swings that repeat from quarter to quarter. Another strategy is to find stocks that the market has driven down in price that have future dividend events which act to pull the share price back up to previous levels.
After some trades that were blown up during the 2015 energy sector bear market, I will admit to
becoming somewhat more conservative when looking at potential profit opportunities. The good news is that has lead to a string of profitable trades, with every recommendation that was opened and closed in 2016 done so at a profit.
If you are new to 30 Day Dividends, this is my service where I share the opportunities I see for short to intermediate term, well above average, profits from the universe of dividend stocks I watch and research. I wait for opportunities rather than trying to force them into a publishing schedule.
In the three years since I launched the service, the closed trades have generated a median 38% annualized return, so the strategies are working. I view this service as a way an investor can put some extra cash or "mad money" to work in the market. It's not speedy gains, with a median 84 day holding period.
One of my favorite market sectors for predictable share price swings is starting to show the signs of profit margin expansion, which should lead to very nice share price gains over the upcoming months. Read on for a new trade recommendation in this issue of 30 Day Dividends.
Land, fly or die, Tim Plaehn, Editor,
30 Day Dividends
F
In This Issue
Seasonal Refining Trade ... 2
Portfolio Update ... 3
Open Positions ... 4
April 2017 Vol. 3 Issue 11
Our Seasonal Refining Trade: PBF Energy
Stocks in the refining industry have been a great source of predictable share price swings. I have recommended several profitable trades a year out of this group. The problem is that the refiners I have used keep getting bought out by larger refining companies.
Initially, Northern Tier Energy provided some great profit opportunities, until it was acquired by Western
Refining (NYSE:WNR). I switched to trades using WNR. Then, last year, WNR agreed to merge with Tesoro Corporation (NYSE:TSO). The merger is expected to close in the next few months, but since the
agreement the WNR share price has just tracked the TSO share price.
Over the last few months, I have been looking at independent refining companies to find one that is well run, pays a regular dividend, and whose share price tracks well with the underlying changes in refining profitability.
The refining business has the interesting characteristic that both the costs of its raw material (crude oil) and the prices for its products (gasoline, diesel fuel, other fuels) are set by outside markets. The gross profit per barrel, called the refining margin, of a refiner can change significantly as supply and demand forces change the prices of crude oil and futures.
To predict future refiner profits, I track crack spreads (a crack spread is an estimated refining margin based on published energy prices) on a week to week and quarter over quarter basis. An increase in the crack spread indicates growing profitability for refiners, and the profit gains can be dramatic.
The results from the recent weeks give a good example. In early March, my crack spread model hit a low of $11.10 per barrel. Since then it has increased to $15.41 per barrel in the last week for which I have data. Out of the spread, a refiner will have operating expenses reported on a per barrel basis.
Typically, it costs $5 to $6 per barrel for a refiner to turn crude oil into fuels. This means a refining margin increase from $11 to $15 per barrel translates into the profit margin going from $6 to $10, if the cost is $5 per barrel. That is a 67% increase in profits!
Historically, refiners generate better margins in the Spring and Summer as gasoline demand increases for the warmer-weather driving season. In 2016, we did not get a big profit boost in the second and third quarter, so more typical historical gains will catch the market by surprise and be very good for refiner share prices.
My model crack spread was declining through January and February and the reversal of that downtrend in March is a very positive sign. If the spread continues to climb into the high teens or greater, the second quarter will be very, very good for these companies. It's important to understand that refining profits are based on the spread and not the price of oil. Falling oil is generally a positive, but profits can go up when energy prices are rising if gasoline and diesel prices increase at a greater rate.
I have chosen PBF Energy Inc. (NYSE:PBF) to be my new refining stock to trade for swings in this industry. PBF is a well run, independent refiner that owns five refineries. Two are on the East Coast, one on the Gulf Coast, one in Ohio and one in California. The Torrance, CA refinery was purchased from ExxonMobil last
April 2017 Vol. 3 Issue 11
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year. The refinery needed some better management and operational fine tuning to improve profitability. Those larger profits should start coming through the rest of 2017. Because California is its own island of strict energy regulations, refining fuels in that state tends to be more profitable than in the rest of the U.S. This three-year chart of PBF shows the nice mid-year share price charts in 2014 and 2015.
It didn't happen in 2016. The share price is now at a low value with a lot of short-term upside potential. I am recommending a new 30 Day Dividends Position in PBF with an initial 25% gain target. If the crack spread really starts to increase, we may hold on for more. I expect to hold the stock up until the end of the third quarter. PBF is a 1099 reporting company.
Recommendation: Buy shares of PBF under $23.40. The initial target will be a 25% gain from the closing price on the day of publication of this issue of 30 Day Dividends.
Portfolio Update
Nordic American Tanker Ltd. (NYSE:NAT) has come up from the mid-March lows, but the share price
remains well below the entry prices. This remains a quarter to quarter hold until a larger dividend is declared that will pull up the share price. I did not expect it to take this long, but at some point NAT will have a highly profitable quarter and declare a large dividend.
In spite of moderate winter weather, Sprague Resources LP (NYSE:SRLP) is up 17% since I recommended the position in October. I expect I will recommend closing the position after the first quarter dividend is declared near the end of April.
The positions in NGL Energy Partners LP (NYSE:NGL) and New Media Investment Group Inc,
(NYSE:NEWM) are about 6% below their entry prices. If you have not bought one or the other, the
potential remains the same, so current prices are an attractive place to buy.
Uniti Group Inc. (NASDAQ:UNIT) went ex-dividend for a $0.60 per share payment on March 29. The
position is now up by that dividend amount of about 3.5%. There remains plenty of upside potential for this stock.
April 2017 Vol. 3 Issue 11
Current Portfolio
Ticker Buy Date Buy
Price Recent Price Target Price Total Return Notes
UNIT 03/16/2017 $25.51 $25.85 $29.40 3.68% Short-term position.
NEWM 02/22/17 $24.05 $14.21 $17.05 -6.64% Long-term position.
NGL 02/09/17 $24.05 $22.60 $27.60 -6.03% Long-term position.
SRLP 10/04/16 $24.11 $27.10 $30.80 17.13% Long-term position.
NAT 09/27/16 $9.98 $8.18 $12.80 -13.43% Short-term position. NAT 08/16/16 $11.13 $8.18 $12.80 -22.37% Long-term position. TEGP 08/03/15 $29.97 $28.76 $45.00 0.34% Long-term position.
Recent price is determined by the last "Ask" price at the closing of the market on the day before publication. Last Updated 03/31/17.
April 2017 Vol. 3 Issue 11
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Recent Closed Positions
Ticker Buy Date Buy
Price Close Price Close Date Annualized Return Total Return UNIT 12/05/16 $25.34 $29.41 02/28/17 79.14% 18.43% TCAP 09/15/16 $19.00 $19.09 12/01/16 2.25% 0.47% BXMT 10/10/16 $28.37 $30.53 11/29/16 55.58% 7.61% TEGP 07/01/16 $23.34 $26.91 11/15/16 46.54% 17.47% TRGP 06/02/15 $92.69 $45.35 11/04/16 -31.68% -45.22% AROC 11/30/15 $10.57 $12.55 09/28/16 25.78% 21.40% PAGP 08/01/16 $10.32 $12.13 09/08/16 168.46% 17.54% WNR 02/26/16 $26.63 $26.47 09/07/16 4.24% 2.25% WNR 06/01/16 $22.68 $26.47 09/07/16 68.48% 18.39% LGCY 07/07/15 $8.75 $1.57 09/03/16 -65.72% -76.34% CNNX 03/19/15 $18.35 $16.97 08/01/16 -0.04% -0.05%
For the rest of the 30 Day Dividends Closed Positions, please visit the ‘Portfolio’ section of our website by
clicking the link below.
Click here to access the online portfolio.
Notes:
Entry price is determined by the last "Ask" price at the closing of the market on the day before publication. Recent price is determined by the last "Ask" price at the closing of the market on the day before publication. Total Return includes share price appreciation and dividend payments to provide a more accurate assessment of returns in that investment. Annualized Return represents what the stock would have returned at the same rate if held for a year; this is a way to balance returns on stocks held for different periods of time. We make no guarantee that any company in the portfolio will continue dividend payments.
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