by Hilary Kramer | March 6, 2014 6:59 am
One stock I like right now as both a solid holding as well as a trading stock is Williams Companies (WMB). We’ve built a position in my Absolute Capital Return Portfolio service, and I also just recommended the calls as a short-term trade in High Octane Trader.
Williams Companies operates pipelines for oil and natural gas. The stock really came to life late last year on word that a couple of activist hedge funds became the company’s largest shareholders and that they were pushing for changes. Activist investors have also pushed for changes at other energy companies like Transocean (RIG) and Talisman (TLM), so this has been a bit of a recent trend.
WMB has been strong since the word got out, gaining nearly 25% since the middle of December. That was when Corvex Management and Soroban Master Fund disclosed in a filing that they had built a position (now more than 8%) in Williams, and that the leaders of each, Keith Meister and Eric Mandelblatt, were seeking appointments to the board. They were successful in the efforts, as Williams announced last week that Mandelblatt and Meister (or an agreed upon industry expert) would be appointed to the board.
In the original filing, Corvex and Soroban said they want to talk with management about the “potential for participating in strategic combinations given the rapid pace of consolidation in the midstream energy industry” as well as “dividends and capital projects.” They also said that the WMB was substantially undervalued.
Another activist investor, Dan Loeb, has joined the party, as recent filings show he started a nearly 3% position in WMB.
WMB also jumped after the last earnings report, as the company beat analyst expectations by reporting 22 cents a share (excluding special items) in the fourth quarter. Full-year 2013 earnings of 82 cents a share also topped expectations, and solid growth is expected this year, with the $1.10 midpoint of guidance representing 34% growth. In addition, the company expects to boost its dividend. Higher natural gas prices in the wake of this year’s cold winter should help.
WMB help up very well during Monday’s sell-off, gaining 0.8% on a day when the major indexes got hit pretty hard. The stock then broke out to new 52-week highs Tuesday and Wednesday, so it remains above its moving averages.
With activists circling, I look for momentum to continue, so there is a trading opportunity here. You might consider buying weekly calls on WMB, specifically the WMB March 14th expiration $41 calls especially if you can get them under $1.70. (They closed Wednesday at $1.52.) Again, these are weekly calls as opposed to the regular monthly March options.
I would look to sell them on a quick move up to $2, which wouldn’t require a big move in the stock. That would be gains of more than 30% from yesterday’s price, perhaps in just a day or two.
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