2 Energy Stocks Bracing for Third-Quarter Trouble

Cabot Oil & Gas Corporation (NYSE:COG) and Valero Energy Corporation (NYSE:VLO) have historically underperformed in the third quarter

Jul 6, 2016 at 3:30 PM
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July started off on a positive note, and while it looked like renewed "Brexit" anxiety was going to weigh on stocks, the broader market has quickly reversed course. July also marks the start of the third quarter, prompting Schaeffer's Senior Quantitative Analyst Rocky White to widen the typical monthly list of best- and worst-performing stocks. While this pair of athletic apparel names could be a boon for options bulls, near-term put buyers may want to keep an eye on energy stocks Cabot Oil & Gas Corporation (NYSE:COG) and Valero Energy Corporation (NYSE:VLO).

Worst 3Q Stocks

COG has done well in 2016, rising in step with oil this year. Year-to-date, in fact, the equity is up 45.1%. However, this upside has recently run out of steam near the $26 mark, with COG last seen at $25.66. Meanwhile, after a historically strong second quarter, the security has turned in a dismal performance over the past 10 third quarters, averaging a loss of 6.3%, and has been positive just 30% of the time.

In the options pits, call buying has picked up steam in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 105.00 ranks just 2 percentage points from a 52-week peak.

Specifically, Cabot Oil & Gas Corporation's (NYSE:COG) July 27.50 call has seen the biggest rise in open interest over this time frame, with 9,641 contracts added. This strike is now home to peak call open interest of 10,665 contracts in the front-month series, and could reinforce historical pressure, as the hedges related to these bets unwind ahead of expiration at the close on Friday, July 15.

VLO is getting hit today, after gasoline margins tumbled to levels not seen since February. At last check, the stock was off 2.7% at $48.41 -- and fresh off an annual low of $47.38. This is just more of the same for VLO, which has shed more than 34% since tagging a record high of $73.88 in late November. If past is precedent, the shares could continue to struggle. Over the last 10 years, VLO has averaged a third-quarter loss of 5.9%, and has been positive just two times.

It looks as if options traders have been bracing for more losses, too. For starters, the stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 3.24 ranks higher than 84% of all comparable readings taken in the past year. Plus, VLO's Schaeffer's put/call open interest ratio (SOIR) of 2.38 rests just 4 percentage points from a 52-week peak. In other words, short-term speculators have rarely been as put-heavy toward the equity as they are now.

Outside of the options pits, however, two-thirds of analysts maintain a "buy" or better rating, with not a single "sell" to be found. Plus, although short interest surged 18.4% in the latest reporting period, it still only accounts for a low 3% of VLO's available float. Should the shares of Valero Energy Corporation (NYSE:VLO) continue their downward trajectory, a round of downgrades or continued selling pressure from shorts could translate into fresh headwinds.

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