Sunday, October 21, 2007

McDermott International Inc ~ MDR

So, I had written 3 covered call options that expired on Friday. PCU got exercised, the other two did not. The exercise of PCU, left a big hole in my 30% allocation for blue chip growth. While I do need to cut back in other areas, I feel that I need to keep the blue chip growth allocation portion of my portfolio maxed, in order to get the most bang for my money, so I have spent this evening reviewing some options, and decided to invest in MDR.

Click here to review a business summary outlined by Yahoo. I just got home from spending the weekend with family in the Bay Area, so I am going to quickly lay out my reasons for choosing this stock, and then get to my review of my sell list, which wasn't done after close on Friday.

First of all, Friday was the 20th anniversary DATE of the crash of 1987 (the 20th anniversary DAY however falls on Monday). The fearful converted to cash in case history decided to repeat itself. Then this came out,

13:50 Morgan Stanley says crude oil "likely to come down sharply"; has "overshot fundamentals" - Bloomberg.
and across the board, Oil stocks started dropping, some in the double digit percentage points. I'm seeing that keeping your head while other's panic is a key component to this game. I'm seeing this as a huge buying opportunity in the oil industry, so I decided to look for a new blue chip in that realm to invest in. I could have increased my position in NOV, but decided against it, as it is already a good size portion of my overall portfolio.

Technically, the chart for MDR looked good. It has had two splits in the past 2 years, one on 9/11/07, and another on 6/1/06. The 10 day displaced moving average has been above the 50 day since 8/10/07. I calculated the return this year, using Fridays closing number which had taken a $5.00 a share hit from the previous day, and found that even with that 8.42% loss in one day, the stock price had increased in value by an amazing 148% in one year! Digging a little further, I found that the stock had doubled in price between the months of May and October. That's 100% ROI in 5 months, which would be 240% annualized.

Now, MDR has announced that it will have an earnings call on November 8th, 9am eastern time. There is always some risk in purchasing a stock before earnings but here are a few points that I have found that I feel limit that risk.

Positive surprises equate into higher stock prices. MDR has had positive surprises on 11 out of their last 13 announced earnings, and has exceeded earning estimates for the third quarter in all 3 of the past 3 years. Back to the chart, the 50 day low is 54.09, and I see support around 54.00. With those two things in mind, and my willingness to risk up to 10% of my investment, I have decided that a buy price below $59.49 is acceptable for this investment. Since I am very unsure of how the market will react tomorrow (where there be more panic, or will the sharks be snapping up all the bargains they can once they realize the sky didn't fall), I am going to low ball my bid at about $54.25. That is down a bit from both the Friday close of $54.35 and the after hours price of 54.77, but above my support support number. I wont be disappointed if I don't get in at this price, but I am going to bottom fish for it a little bit before I chase it up.

Always perform your own due diligence before making any investment.

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