Today, I’m looking at the opportunity with Chicago Bridge and Iron.
music selection: “Iron Man” — Black Sabbath
I’m full up on my asset allocation for written puts right now. I’ll have more room after CVX and maybe JNJ get called away next month. I want to discuss CBI as an example of something that is on my watch list even though I’m not going to trade it today.
Chicago Bridge and Iron moved beyond building bridges a hundred years ago. It is now in many different types of heavy construction. It is building the only new nuclear power plants under construction in the US. It is also a major player in the ongoing build out of oil and gas midstream assets. The company is a little beaten up share price wise but I think the market is being irrational. The company has a huge project backlog (about 30 billion.)
The S&P 500 average price to book is about 2.7 but CBI is trading at only 1.5. This is a real bargain. Likewise, the P/E ratio is just 7.3 which is remarkable given the revenue certainty of a 30 billion dollar backlog. There is some litigation with Westinghouse on a nuclear plant construction deal. It shouldn’t be big enough to wreck the company though.
I like CBI up to a price of 50 per share. Today’s price gives us lots of upside from 41.28. For that reason I like the looks of selling CBI151127P00041000 today for at least 2.50. That trade would be open for 36 days and the annualized return would be an impressive 61.82%. This is a fantastic opportunity as your “downside” is owning a company with two full years of revenue certainty at a great price. Raptors playing the home game and get assigned should write covered calls against the position somewhere around 10% out of the money (just eyeball it, this isn’t an exact science) and target 6 weeks out on the expiry. Keep this up until the strike reaches 50, our estimate of full value and our exit target.
Devour your prey raptors!