52.4% Upside in the Bakken Bull Market

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Last week, U.S. markets continued to lament President Obama’s victory. The Dow Jones was down 1.77%, and the S&P 500 dropped another 1.45%. Nor did global markets avoid the sell-off with the MCSI Emerging Markets Index also tumbling 1.44%.

Your Bull Market Alert portfolio did have a big gain in United States Natural Gas Fund LP (UNG) as gas prices recovered. Moving above its 50-day moving average (MA), UNG is back to a BUY. Your position in Discover Financial Services (DFS) dropped slightly below its 50-day MA and is now a HOLD. Finally, you were stopped out of SeaDrill Limited (SDRL) and CVR Partners, LP (UAN).

By all the technical measures I look at, the U.S. market is as oversold as it has been since the market pullback in June. That also means that the market is due for a bounce. When it does, your Bull Market Alert portfolio should recover strongly.

In the meantime, I’ve been looking long and hard for yet another bull market among all of the doom and gloom. And with this week’s pick — HollyFrontier Corp (HFC) — I’ve found one, as well as a way you can profit from it.

Last week, the International Energy Agency (IEA) made the stunning prediction that the United States will overtake Saudi Arabia and Russia as the world’s top oil producer by 2017. That is largely thanks to high-pressure fracturing and horizontal-drilling techniques (“fracking”) unlocking light tight oil and shale gas resources in the Bakken Shale region spread beneath North Dakota, Montana and Saskatchewan. These techniques have lifted North Dakota’s oil production from less than 100,000 barrels per day in 2005 to 729,000 barrels per day in September.

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The rise of shale oil production has put Midwest-based oil refiners at a huge advantage compared to their competitors. These refiners now pay less for crude than their counterparts on the East and West Coasts, and are thus starting to crank out the big profits. And as Dallas-based HollyFrontier (HFC) operates refineries in El Dorado, Kan.; Tulsa, Okla.; Artesia, N.M.;  Cheyenne, Wyo., and Woods Cross, Utah, it is perfectly positioned to benefit from the Bakken bull market.

As the market begins to digest the implications of the changing energy landscape in the United States, consensus earnings estimates for HFC for both 2012 and 2013 have risen some 20% in the last three months. At the same time, the stock is selling near the bottom of its five-year valuation range, based on Price Earnings, Price to Cash Flow, and Price to Book measures. HFC also has one of the best balance sheets among the refiners with no net debt.

HFC stock has also avoided much of the market downturn after the election, and actually hit an all-time high of $42.65 on Friday. But there is plenty of juice left in HFC’s tank. On Nov. 9, investment bank Barclays upgraded its price target on the stock to $65 — 52.4% upside from Friday’s close.

So buy HollyFrontier Corp. (HFC) at market today, and place your stop at $36.00. If you want to play the options, I recommend the March 2013 $42.50 calls (HFC130316C00042500).

Portfolio Update

Bank of Ireland (IRE) ended the week flat. Bank of Ireland recently issued an interim management statement highlighting good news such as an increase in net interest margin, a leveling of the number of home loans in arrears, and a reduction in its government banking guarantee payments. IRE also plans to decrease its reliance on the government Eligible Liabilities Guarantee (ELG) fund — a fund that guarantees deposits and debt securities for Irish banks. IRE is now a HOLD.

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National Bank of Greece SA (NBG) fell 11.66% over the past five trading days. NBG incurred the bulk of its losses early last week as regulators failed to issue an expected weekend decision on Greek aid. However, the European Union’s top monetary official, Olli Rehn, said that Greece had made “substantial progress” toward its next aid payment, and the German Finance Minister Wolfgang Schaeuble said there was no threat of the International Monetary Fund pulling out of the Greek aid program. A Tuesday decision on aid financing is expected, after which the stock should rally. NBG is a HOLD.

Michael Kors Holdings Ltd. (KORS) finished flat for the week. KORS reported strong earnings last Tuesday, reporting $0.49 earnings per share vs. $0.40 per share estimates, and a 74.4% jump in quarterly sales. September retail sales data also jumped 0.8%, beating 0.6% forecast by analysts, thanks to improving consumer sentiment going into the holiday season. KORS is a HOLD.

Stratasys, Inc. (SSYS) lost 3.45%. SSYS dipped to its 100-day moving average last week, but managed to maintain its position above this line as it has done since last October. Analyst firm Piper Jaffray also upgraded Stratasys from ‘Neutral’ to ‘Overweight,’ and raised its price target to $76.00 — a hefty 20% above Friday’s close. SSYS is a BUY.

United States Natural Gas Fund LP (UNG) jumped an even 8.00%. Natural gas heated up last week after several positive news stories broke. Ken Hersh, CEO of the largest U. S. energy private equity firm, believed a decrease in supply and an increase in demand may be forthcoming. He also noted that it is now cheaper to produce natural gas than coal — a fact that could have major implications should U.S. power generators start shifting from coal to natural gas. UNG is a BUY.

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PowerShares Listed Private Equity (PSP) fell 2.02% over the past five trading days. Private equity continued to suffer last week from the consequences of President Obama’s re-election. Nearing its 200-day MA last Friday and very oversold, PSP is due for a well-earned bounce. PSP is a HOLD.

Discover Financial Services (DFS) lost 3.94% during its first week in your portfolio, in a week of mixed news. The Fitch Ratings agency issued a press release last Wednesday, reporting a surprise increase in credit card delinquencies. In contrast, an analyst opinion piece last Thursday cited increased transaction volumes and the improving global economy as positive factors for the outlook of American Express and Discover Financial Services. This caused DFS to rebound slightly on Friday. DFS is just shy of its 50-day MA and is a HOLD.


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