Key points
- It appears that options traders are back in the market and picking three stocks with a thesis around higher oil prices.
- With a different narrative for your portfolio, you can find a balance between speculation to an almost sure bet.
- Wall Street analysts and institutional buyers confirm the forecasts.
- 5 stocks we like more than Daqo New Energy
Most investors focus on the volumetric profile of the stocks they analyze, forgetting that there is another primary market that can serve as a leading indicator. Options often give an idea of the direction the market expects a stock to take. The best way to serve you is to observe the activity in those markets.
By paying attention to unusual options activity in certain stocks, you can spot these opportunities before most of the market even realizes what’s happening. This is why I like a highly cyclical game Transocean Ltd. NYSE: RIGa similar long-term macro play Daqo New Energy Corp. NYSE: DQand the most stable of all, The Coca-Cola company NYSE: KO should be on your checklist today.
There are more than a few reasons why these stocks have caught the attention of these traders today, reasons that you too can follow to earn a decent return.
Final bets on China’s return
Daqo New Energy surged 76% after its quarterly earnings announcement. Traders see the initial price action as perhaps the start of an even more significant trend. Still uncertain about the timing, they chose to opt for call options instead of buying the shares outright.
China today is an exciting story, with mega investors like Michael Burry (yes, the guy who defined the 2008 financial crisis) and even Ray Dalio buying into the region. While these whales can’t take risks on smaller companies like Daqo, you don’t have that limitation.
According to analysts, oil prices have surpassed the maximum limit of $80 per barrel The Goldman Sachs Group Inc. NYSE:GS I think it could go up to $100 a barrel this year. This would make alternative energy more attractive, which is where Daqo comes in.
Because it makes polysilicon, the main ingredient in the chips and tools that make solar panels work, it would be the first stock in line to pay. Based on China’s history and the shift in energy preferences to expensive oil, traders think this could happen soon.
In fact, Wall Street analysts believe Daqo shares could rise 45% from their stock price target of $38.6. Now you know one of the reasons behind this view and why options traders are rushing into the stock market.
Transocean is first in line
Speaking of rising oil, Transocean is key in supporting energy giants like ExxonMobil Co. NYSE:XOM to start producing and marketing more expensive oil. Because it sells and leases rig equipment, among other things, Transocean is first in line to get paid for this oil.
The price of oil is estimated to have increased in the quarter following Transocean’s latest earnings announcement, making it highly likely that an earnings increase will occur in the company’s subsequent quarterly results. This is a reasonable thesis to make, so options traders felt confident entering the name ahead of the announcement.
After rallying as much as 28% over the past month, this stock still has a long way to go. Wall Street analysts believe earnings per share (EPS) could grow as much as 370% over the next 12 months, a projection that has pushed price targets higher to $7.9 per share, calling for a rally of the 37% compared to today’s prices.
Two major players have bought the stock lately, both Vanguard Group and Fisher Asset Management, and their stake in the stock has increased this month. Vanguard’s 6.4% raise represented a trade on the order of $27.8 million, while Fisher’s 11% raise indicates a $180,000 bet to complete.
Coca-Cola ties it all up with a bow
Keeping up with the oil story, higher prices may not be reasonable for the US dollar. A declining dollar against other currencies can make large international companies like Coca-Cola more attractive.
Not only that, but being a $260 billion behemoth allows Coca-Cola to cover any increases in shipping and manufacturing costs that might result from higher oil prices. This all seems like the perfect, least speculative opportunity to fix what’s happening.
It’s hard to find double-digit upside in these big companies, but now that the writing is on the wall (or so options traders think), analysts at Citigroup Inc. NYSE:C see a price target of up to $68 per share, which is about 15% higher than the stock’s trading price today.
As the low beta name in this group, Coca-Cola represents the cheapest and least risky alternative to take advantage of today’s market interest in the options market.
Before you consider Daqo New Energy, you’ll want to hear this.
MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Daqo New Energy wasn’t on the list.
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