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Timing Options or Buying for the Long Haul

Updated on October 18, 2012

The Cases of USG, Gannett, Chesapeake Energy and Darling International

by Robb Hoff

October 18, 2012


Listening to CNBC's Jim Kramer interview the much-maligned co-founder of Chesapeake Energy Aubrey McClendon had to seem like a gate was opening for stockholders who have rode out the rough tumble the company's stock has had in the wake of McClendon's highly publicized fall from grace.

Why?

Because McClendon made it clear that in many ways the proliferation of both natural gas and crude drilling operations here in the United States will ultimately prove to be the pivotal competitive edge that the U.S. will have over other countries for long-term, stable economic growth.

In other words, McClendon made it clear it's not about Aubrey at all -- it's all about Chesapeake Energy and how its survival through a winter of discontent promises to push the CHK price up like a gusher.

Due to lots of fishing, golfing and watching Cincinnati Reds games, I limited my stock-picking analysis last quarter to just four stocks with Chesapeake Energy (CHK) being one of them.

My advice then -- on June 21 -- was that Chesapeake Energy was worth buying for both the short and long term at $18 per share. Four months later, that still would seem to hold true. Now that CHK appears to have punched through $20 for good, the short term might provide an even better buy, especially if this winter is more like winter than last year's lack of it and natural gas usage for heat soars through the roof.

Another stock I liked for the long term last quarter -- Darlington International -- still seems like a hold for an industry leader that optimized its position to grow through acquisitions that expanded its base. But Darlington (DAR) hasn't rendered its reckoning yet, two months after I gave its stock the thumbs up as a long-term producer. It was under $17 per share then and followed a nice spike before the bottom fell out a bit. Now at $17.40, DAR is a solid hold but won't likely spike again until the winter passes and natural gas prices fall, which will allow Darlington to offset the spike in production costs caused by rising natural gas prices.

Among the other two stocks I reviewed last quarter was drywall leader USG Corporation, which I suggested would have been best played as an $18 put option for July.

There i was wrong -- USG never dropped to $18 a share before the July options expired. It did drop lower than $16 per share later in July, but then the unlikely happened: the bull charge was set off for the home builder industry. Now, USG has reached a high it hasn't attained since September of 2008 when the reality of the collapse of the U.S. economy was at hand in earnest.
Now, some may believe USG has operated from a position of industry-leading strength well enough to sustain this recovered altitude, but I am not among them and would take a long look at a buying a put option under $20.

Last but certainly not least is Gannett Co., Inc. -- the newspaper people.

In early July, Gannett seemed like an excellent long-term buy for its strength to appeal to regional audiences who would be more likely drawn into Gannett's newsprint and online outlets if economic conditions worsened, which they are still likely to do with the advancing fiscal cliff still threatening to transform the landscape of local and state governments.

Gannett still is an excellent long-term hold, but it rose too high too fast in my opinion on a nice earnings report and the idea that revenues projected through mandatory online subscriptions will sustain some hitherto unreachable boon.

There was more put demand for Gannett at $14 in July than call demand at $15, and I liked the stock at $12. Now, I most definitely like the put action on Gannett, especially at $15 or $16 more than I like the stock at nearly $19.

So in a nutshell, I like the following for November:

Chesapeake Energy (CHK) Buy at $22 because it should reach $30 by year's end.

Darlington International (DAR): For the long-term only but only now if bought on a dip below $16.

USG Corporation (USG): A definite sell at nearly $25. A November put at $21 might work in time to capture a nice gain if the housing market gets the rug pulled out from under it with the onset of winter.

Gannett Co., Inc. (GCI): If the stock hovers in the $20, it's less appealing but still not out of the question for a nice gain in the months ahead. The likelihood of buying Gannett at $12 looks like it's way gone in the rear-view mirror, but a put at $15 might be worth a play just in case there's a dip before there's a guarantee of spiked revenues.

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