I am not a fan of shorting stocks. I prefer benefiting from positive ideas, but sometimes I see extended situations that are too tempting to ignore. ConocoPhillips (NYSE:COP) has had an incredible rally of late and that’s the focus of my write up.
So, today I want to attempt a bearish bet on COP, but without any out of the pocket expense. This is an uber-bullish equity market where shorting stocks is hazardous to one’s portfolio.
Clearly, I won’t be shorting the stock outright. I will use options instead because much like catching falling knives is dangerous, so is shorting shooting stars. ConocoPhillips is a star that should retrace lower soon.
Before you label me evil for shorting a rally, know that my last COP trade — back in May when everybody hated it — was a winning bullish trade. Typically, I prefer to enter bullish setups in oversold conditions. But the recent rally in energy prices has gone too far, too fast in my opinion.
The fundamentals of oil prices have not changed in months. Above $52 dollars per barrel, OPEC has the incentive to push it down. Otherwise, they’d lose the market share for which they fought really hard to regain in 2016.
There is a theory out there that this time it’s a little different because they want high energy prices during their IPO for The Saudi state oil company. I don’t yet believe that. So, in essence, I consider this a bet against oil prices more so than one against COP stock.
I decided to short an energy stock rather than an exchange-traded fund (ETF) like the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) because the energy stocks have gone much farther. ConocoPhillips is up 12% in a year whereas the XLE is down 3%.
Today’s trade is not a knock against the company as a whole. Meaning I don’t expect a complete disaster. However, I do want to short the price action of late.
Fundamentally, COP stock is not a screaming value case because it runs at a deficit. But from a price-to-book perspective, it’s not bloated either. So far, the company has been committed to the dividend and for as long as oil prices hold up it is likely to continue that.