TRADE INSTRUCTIONS
Date: September 27, 2017
Name: BHP Billiton
Symbol: BHP (NYSE)
Type: Open
Limit: Buy below $42

TRADE TARGETS
Holding Period: 5 months
Target Return: 21.4%
Annualized Return: 51.4%
Target Price: $51
Stop Loss Level: $35.50

COMPANY DESCRIPTION
BHP Billiton Limited discovers, acquires, develops, and markets natural resources worldwide. It operates through four segments: Petroleum, Copper, Iron Ore, and Coal. The company explores for, develops, produces, and markets oil and gas in the Gulf of Mexico, Western Australia, and Trinidad and Tobago. It also explores for copper, silver, lead, zinc, molybdenum, uranium, gold, iron ore, and metallurgical and thermal coal. The company was formerly known as BHP Limited and changed its name to BHP Billiton Limited in July 2001. BHP Billiton Limited was founded in 1851 and is headquartered in Melbourne, Australia. BHP Billiton Limited is a subsidiary of BHP Billiton Group. Link to company website.

TRADE RATIONALE       
Last month I added BHP Billiton to the PF Growth Portfolio for reasons that I will not reiterate here (“BHP Billiton is Back in the Black”), but suffice to say that it appears to be on the verge of reaping the rewards of spending the past several years paring down its operations to those that stand to benefit the most from the major long-term, macroeconomic forces at work in Asia.

Turns out, our Rapid Profits Matrix also likes BHP from a short-term perspective due to its rapidly improving balance sheet. The combined effect of its reduced debt burden and huge cash flow is a 10% jump in its gross margin from 72% to 79%. As a result, the company has a publicly stated goal of increasing its return on capital from 10% last year to 20% over the next five years.

When businesses are generating that type of cash flow, they are often tempted to do something with it in the form of acquisitions. But BHP has learned its lesson from its prior ill-fated expansion into non-core activities and has stated that it intends to return excess cash flow to shareholders via share repurchases and dividend payments.

Quite frankly, it is difficult to imagine a scenario that could hurt BHP over the long haul, and only a pronounced drop in oil prices could do much damage in the near term (oil & gas comprise roughly a quarter of BHP’s total revenue). But with global commodity prices on the rise and Saudi Arabia due to sell off a $100 billion stake in its oil business next year, it appears unlikely that they will increase production to drive down oil prices as they did last year.

 NOTE: This stock is optionable.