Diamond Offshore: Pull-back is buy opportunity

Other positives: Diamond also bought two semisubmersibles in Q3: one is operating in the Gulf of Mexico, and the second should be deployed in Q1 2010. The First Call FY2009/FY2010 EPS estimates for DO are $10.17 to $9.72.

Still, the risk with DO is clear: a sustained drop in oil/natural gas prices would hurt dayrates and send DO's stock into a swoon. While some pull-back in oil prices is expected in 2010, the view from here argues it will not be longer than 1-2 quarters.

Technically, Diamond's stock chart is strong -- an uptrend. True, Diamond recently dipped below the key, 50-day moving average, but given that DO's price doubled in 2009, that's most likely year-end profit taking by short-term institutional investors. Hence, view the pull-back as a Buy opportunity. Diamond's break through $100 psychological resistance earlier also is encouraging.

Stock Analysis: Diamond Offshore Drilling is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in DO now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your DO position before February 2010. Sell/Stop Loss if you were to buy shares in this company: $42.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.