RIG

To me this stock looks incredibly cheap. first of all it has beat earnings expectations for the last 8 quarters except for Q3 of 2007. Its growth rate, while expected to slow is still incredibly high especially for the price that it is selling at. its price to earnings ratio is 4.94 which is very good. most companies with slow/no growth have p/e ratios under 10 but this company has a p/e under 10 even though it can still be considered a growth stock. this is reflected in another metric called the peg ratio or price/earning/growth ratio. RIG has a peg ratio of .22 which is the lowest in its industry suggesting that it is a good value. The company also has a very solid balance sheet and operates in an industry that is unlikely to take a serious hit even if the world does slide into a recession. As long as oil stays roughly were it is now or goes higher then the demand for oil rigs should go up. Currently oil is priced for a pretty major worldwide recession and I do not see it getting nearly as bad as that.

So if you decide that you like RIG don't just jump in an buy it right away. there are many ways to play this company that offer a potentially better risk/reward ratios.

1. buy the stock. this is the obvious trade and could easily get, in my view, a yearly return of around 50-60% over the next few years. the risk is limited and if the stock does go down significantly(10% or more) I would simply recommend buying more (unless the fundamentals have changed) which would lower your average buying price and allow you to make even more money when it does go back up

2. Jan,15 2010 120 strike call option. this option is currently selling at 7.50 per contract and offers incredible potential returns. If you don't know what options are then read what I am about to write. If you understand how options work then skip it.

an call option is a contract that is sold on the market that gives the buyer the right to buy a specified stock, at a specified price, before a specified date. the specified price is know as the strike price. I think the best way to explain how options work is to do a simple simulation.
the date is October 2 2008
imagine stock Z which has a market price of $10 per share
A call option, Zabc, has an expiration date of November 2 2008, a strike price of $12.50, and currently sells on the market for $1 per contract.
You buy one Zabc option on the market.
you now have the right at anytime before November 2, to buy stock Z at a price of 12.50 REGARDLESS of the market price of stock z. for example, on October 5 stock Z could be selling on the market at a price of $17 per share. If you choose, you could exercise our call option and then buy 1 share of Z at a price of 12.50 even though it is selling on the market for $17. after executing the option you make an instantaneous $4.50 because of the difference between the stock price and the strike price of your call option. you paid $1 for the call option so your net profit is $3.5 off of a $1 investment which is a gain of 350%. had you simply bought stock Z on october 2 for $10 per share and sold it on October 5 for $17 per share you would have only made a profit of $7 off of an investment of $10 which is only a 70% gain which is by comparison a small gain. if that confused you which it proly did (I dont know anyone who ever understood options after their first time hearing what they were) then try hearing it explained in a slightly different way and it might make sense. http://optionmonster.com/education/


ok back to the analysis
buying the jan 2010 option 120 strike give the stock 451 days to go back up to $120 per share and once the stock starts to go up beyond that the profit will start to growth extremely fast. it would not surprise me to see the stock selling at 200 by that time which would lead to profits of over 1000%. the amount at risk in this investment should not be more than half the investment worst case scenario and i deem that to be EXTREMLY unlikley.

3. May 15, 2009 120 strike selling for $3.20. If you, like me, think that this stock will start to head back up relatively soon then this is probably the contract for you. in my opinion RIG could be selling at somewhere around 150+ by the time of expiration which leads to profits well over 900% in a shorter time than listed above. of course this is one of the riskier plays on this stock but in my opinion it is a well calculated risk that offers HUGE potential rewards.

The reasons options are advisable for this stock is because I think that it has the potential to move up very significantly (+50%). The best way to take advantage of such a large move at a relatively low cost is to get out of the money options which is what both of the options listed above are. There are many other possible option contracts that could be used to play RIG, the two above are just my favorites.