We Close for a 3600% Gain in One Flippin’ Week! – and Open Afresh on the Utility Front (UGI, XLU, TRN)

With glory to the G-d of Israel, we’re gracing your inbox a day early this week – again to avail ourselves of a dynamite offering from the land of the Utilities.

But first, we take a trip to the bank.

The above mentioned closure relates to our March 31^st missive, entitled False Gods Railroaded! Trinity Tumbles!  There, you’ll recall, we urged you to sell the TRN May 20^th 32/37 CALL spread for a credit of $2.30 and buy the TRN May 20^th 35 PUT for $2.35.  Total debit on the affair was $0.05.

And now we’re pleased to report that the CALL spread can be repurchased for $1.75 (2.05/0.30), while the PUT can be sold for $3.60.

Execute on both and you walk with $1.80 NET on a nickel expended.

And that’s a cool 3600%.

Strike up the rebel songs!

Now we move to this week’s endeavor – a play on the utility sector that we believe could produce another hum-dinger win.  That trade’s been calibrated with unlimited profit potential, a sizable opening credit and possesses a defined, modest downside if we’re wrong.

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It’s based on Pennsylvania’s UGI Corporation (NYSE:UGI), provider of energy to the people of that state’s central and eastern regions.

The thing with UGI is it’s been acting like Wrong-Way Corrigan of late, dropping in price even as the rest of the utilities were soaring.

How to explain it…?

Managerial incompetence?

Domestic terror?

Saturn square Venus?

The only reason we care to posit is the teleological one: that we might avail ourselves of tremendous winnings via a clever selection of her options.

Fundamentally, we’re dealing with a very cheap stock –

• P/E is 7.44,
• Dividend Yield is 3.80,
• Price to Book is just 1.48,
• The company grew earnings by 26.80% per year for the last five years, and
• Are expected to grow them by a further 16.01% next year, according to consensus.
• And finally, insiders began BUYING shares in late February – the first purchases of the stock in a year. Total value of those purchases was $2.5 million.

Have a look now at the chart –

Technicals are as follows –

1. After an earnings miss, the stock crashed by nearly 30% in just over a month, as indicated by the declining red trend-line.
2. That triggered an oversold RSI read along the way (in green),
3. Amid a surge in volume (in black).  Taken together, these items appear to be signaling an intermediate change of trend.
4. Price then broke sideways through the trendline – a positive development, while
5. Both RSI and MACD indicators moved north toward their respective water-lines.  Also constructive.
6. Next resistance is at the long-term moving average at 41, and we believe the shares will now begin their approach to that level.
7. Moving averages are rolling lower, but there’s still ample room here for a bounce.

And that’s precisely what we’re playing.

But not solo.

That is, we’re pitting UGI against the broad Utility sector, as represented by the Utilities Select Sector SPDR ETF (NYSE:XLU).

As mentioned above, action in the utilities has been stellar.

Take a look at the two charted against one another for the last half year –

Striking, no?

The utilities, as a group, are overbought.

And UGI is oversold.

And that begs the following –

A Jew and His Gold recommends you consider a long position on UGI stock (now trading at $36.08) and an offsetting short position on XLU (now trading at $75.39).  Purchase the protective XLU May 78 CALL for $0.77 and sell the protective UGI May 35 PUT for $0.85.  Total credit on the trade is a numerically enchanting $39.39.

Rationale:  with UGI having bottomed and XLU now at a top, it makes sense to go two ways here, and expect a pinch.

We did it safely by adding the options for protection.

So, our max gain on the trade is UNLIMITED.

While our max loss is $3.69 (difference between the bought (and sold) prices of the stocks and their respective options’ strike prices [78 – 75.39 and 36.08 – 35]).

It’s also possible to set STOPs on the shares to close the trade at levels more worthy of your risk tolerance, but the above affords us time away from our screens, and for that, we say it’s worth it.  It also offers us a further, small credit.

And we can use as much of that as we can get.

May we always find favor in the eyes of the Al-mighty.

Many happy returns!

Matt McAbby

Follow @HughLOHaynew