Monday, July 25, 2011

Short-Selling Into a Energy Supply-Demand Imbalance

The stock market is at major crossroads this week or next in my opinion. Its either up into a new breakout uptrend or back down into a bear market again. I’m betting on prices heading lower over the long-term from here and these resistance levels are the levels where it breaks up or down in my opinion. If the dollar does a reversal here, stocks would normally go down, and the USD is very close to that point for it to happen. Or vice versa, if stocks head down, the dollar would normally go up. When everyone is on one side of the trade, you have start thinking about moving to the other side at some point. First in and first out is always better than last in and last out when it comes to the money markets.

With the financial crisis going on in Europe and USA currently, do you actually think GDP in these countries is going to keep steady and or moving up along with sustainable increasing earnings? I am bullish on China on a selective stock by stock basis now after a recent sell-off downtrend there, but not across the board. They have their own problems too.

Click here to review my buy long China stock picks for this week.

Now for my stock pick this week. It’s Sunoco Ticker SUN. They are in the USA energy space and are having supply-demand imbalance problems that make them a low-risk high-reward short sell candidate. I agree with Zacks on selling them. Whether you’re buying or selling, always use stop-loss in case your positions go against you to preserve your capital for another day of investing and trading.

Zacks Investment Research reports that in an attempt to expand its retail web, Sunoco added 13 sites of its namesake brand in Birmingham, Alabama. The expansion was done under the terms of an agreement entered into with Quality Petroleum of Alabama and Chattahoochee Oil, a distributor of petroleum products.

The existing set-up of Sunoco retail sites consist of more than 4,900 stores selling transportation fuels and convenience items. Constructions of the new outlets are underway and will be made part of the Sunoco brand by the end of the third quarter.

Management remains highly upbeat about this development and noted that the new stores will widen Sunoco’s horizons. The company is also tying up with various distributors that will likely strengthen its foothold in Midwest and other Southeastern states.

Sunoco has embarked upon the strategy to make additions to its store base from early 2010 and has established more than 250 new retail locations till date. Last December, the company signed an agreement with Pennsylvania-based Lehigh Gas Corporation to acquire 25 retail assets in Buffalo, Syracuse, Albany and Rochester markets of central and northern New York.

Headquartered in Philadelphia, Sunoco is a leading independent refiner and marketer of petroleum products as well as a manufacturer of chemicals. The company also has interests in logistics and cokemaking facilities.

However, we believe that Sunoco’s near-term growth prospects remain clouded due to the supply-demand imbalance of refining products. Moreover, the company’s successful restructuring initiatives have been overshadowed by operational reliability issues and increased unscheduled downtime. We expect these issues to continue for some time, creating pressure on stock performance.

Taking into account these factors, we expect Sunoco shares to perform below the market level over the coming months and maintain our long-term Underperform rating on the stock.

Sunoco, which enjoys 31% interest in Sunoco Logistics Partners, L.P. currently retains a Zacks #4 Rank (short-term Sell recommendation).

Sell Short Sunoco – Ticker SUN

Sell Entry: 43.48 to 45.43

Stop-Loss: 47.69

Take Profit Areas: 38.07 to 37.40, 35.60 to 35.00, 30.57 to 30.04, 23.91 to 23.39

Company Profile

Sunoco, Inc., through its subsidiaries, refines and markets petroleum products, and manufactures chemicals in the United states. It operates in five segments: Refining and Supply, Retail Marketing, Logistics, Chemicals, and Coke. The Refining and Supply segment manufactures petroleum products, including gasoline; middle distillates, such as jet fuel, heating oil, and diesel fuel; and residual fuel oil, as well as commodity petrochemicals comprising refinery-grade propylene, benzene, cumene, toluene, and xylene. This segment sells its products to wholesale and industrial customers. The Retail Marketing segment engages in the retail sale of gasoline and middle distillates, as well as in the operation of convenience stores. As of June 28, 2011, this segment operated approximately 4,900 Sunoco-branded retail locations in 24 states primarily on the east coast and in the midwest region of the United States. The Logistics segment operates refined product and crude oil pipelines and terminals; and acquires and markets crude oil and refined products. As of June 28, 2011, this segment owned and operated 7,600 miles of refined product and crude oil pipelines, as well as approximately 40 active product terminals. The Chemicals segment manufactures, distributes, and markets commodity and intermediate petrochemicals. This segment offers aromatic derivatives including phenol, acetone, bisphenol-A, and other phenol derivatives. The Coke segment owns and operates metallurgical coke plants; and metallurgical coal mines located in Virginia and West Virginia. This segment sells metallurgical-grade coke for major steel manufacturers. The company was founded in 1886 and is based in Philadelphia, Pennsylvania.

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Click the Sunoco stock chart below for a larger view.