We are going to look at two companies which we think would make fine additions to almost any portfolio. The first play is Kodiak oil & Gas (KOG) and the second play is Apache Corp (APA). Both plays are in the basic materials sector. Apache Corp offers long term investors with the chance to lock in sure but steady gains. It also appears to be in the process of putting in a bottom. The recent BP acquisitions, the deal to acquire Marin Energy and the deal where Apache purchased a portion of Devon Energy's (DVN) Gulf of Mexico assets should help improve earnings over the long haul.
Kodiak Oil & Gas on the other hand has an estimated EPS growth rate of 50% for next 3-5 years and an incredibly strong quarterly revenue growth rate of 279%. The percentage short of the float stands at 11.5%, and this makes it a very good candidate for a short squeeze. Kodiak Oil & Gas is a stock with great growth potential and it provides investors with the opportunity to lock in lucrative gains over the years to come. In our opinion, both these stocks would make a good addition to any long term portfolio.
We are going to examine both companies from a technical and fundamental perspective, starting off with Kodiak Oil & Gas.
Reasons to be bullish on Kodiak Oil & Gas:
- A very strong quarterly revenue growth rate of 279%.
- Zacks has a 3-5 estimated EPS growth rate of 50%.
- Oil production has spiked significantly from 3953 BOE per day in 3rd quarter of 2011 to almost 16,000 BOE per day, in the 3rd quarter of 2012. This represents an increase of 25% over 2nd quarter figures of 12,700 BOE per day. It also represents an increase of over 300% over 3rd quarter figures in 2011.
- The percentage of shares held by insiders increased from 4.7% in June 2011 to 10.32%. This represents an increase of over 100% in just roughly 5 months.
- Short percentage of float increased from 4.3% in June 2012 to 10.9% in October and the current figure is 11.5. This makes it a very good candidate for a short squeeze.
- Net income, cash flow per share and sales have improved significantly over the past 3 years and this trend is likely to be maintained going forward.
- Annual EPS before NRI has been trending upwards and has improved significantly in the last two years.
- A strong five year sales growth rate of 93%.
- A profit margin of 19.39%.
- Analysts have a projected sales growth rate of 194% for the current quarter and 268% for 2012. For 2013, they have a projected sales growth rate of 87%.
- The company continues to reduce cost while at the same time improving efficiency. For example, the average drilling days from spud to rig release were reduced to 20-25 days as compared to the average of 35 days a year ago. Management expects to drill more wells with 7 rigs in 2013 than they did with 8 rigs in 2012.
Charts and tables of interest
The relationship between the price of a stock and the consensus EPS dictates that when the stock is trading above the consensus EPS line, the stock tends to perform significantly better. As the stock is trading well above this line, it is expected to perform well and strong pull backs should be viewed as long-term buying opportunities.
Historical and future growth rates for KodiakOil & Gas and several other players in the industry are illustrated in the above graph.
$100K invested 8 years ago would have grown to $219K. We simply multiplied the starting figure with 100. In the above table the starting value used was $1K.
The stock is currently consolidating with the overall market and it put in a double top formation on the 18th of October. Double top formations are generally bearish in nature and indicate that the stock is going to pull back. This is exactly what has taken place so far and the weekly close below $9.00 indicates that the stock could test $7.50 before putting in a bottom. The good news is that the overall outlook is bullish and if it dips to $7.50 or lower, investors should view it as a long-term buying opportunity. Consider waiting for a test of the $7.50 ranges before committing new money to this play.
As it has put in a double top formation, the ideal set up would be for it to test $7.00 and in doing so complete a double bottom formation. It does not have to follow this path, but if did it would be a very bullish development. Consequently a weekly close above $9.50 should also be viewed as a bullish development. It will indicate that the worst is behind the stock and that it is ready to challenge the $10.50-$11.00 ranges.
Reasons to be bullish on Apache Corp:
- Zacks has a estimated 3-5 year EPS growth rate of 5.2%
- A five year net profit margin of 18%
- The recent BP (BP) acquisitions, the purchase of a portion of Devon Energy's GoM (Gulf of Mexico) assets, and the deal to acquire Marin Energy will help compliment the company's asset base and contribute to earnings going forward.
- A very high retention rate of 90%
- It had sales growth rate of 4.6% per annum for the past five years and analysts are projecting growth rates of 5.2% per annum for the next five years.
- A strong positive levered free cash flow of $972 million.
- Five sales growth rate of 11%
- Sales are expected to grow by 8.10% in 2013
- Cash flow should improve from its operations in Australia, which it has been growing steadily over the past few years.
- A very low payout ratio of 10%
- A strong interest coverage ratio of 13.00
- A manageable long term debt to equity ratio of 0.36
Charts and data of value
The orange line represents the valuation growth rate line. Generally speaking, when a stock is trading below this line and in the shaded green area, it represents a good long term entry point. Apache is trading well below this line, so from a long term perspective it makes for a good play.
EPS is projected to come in at $10.54 per share in 2013, this represents an increase of 6% over its 2012 estimate of $9.86.
When the stock is trending above the EPS consensus line, it indicates higher prices. Apache is trading below the EPS consensus line and this why it has been a laggard for the past 12 months.
However, the EPS line has started to trend upwards, the stock appears to be putting in a bottom and analysts are projecting growth rates of 5.2% per annum for the next five years. These developments should help stabilize the stock. Individuals who take the plunge now could be well rewarded in the future.
No. of Analysts
Year Ago EPS
The Technical Picture
The break below $80 has turned the short-term trend to negative and there is a chance that the stock could test its two year lows at $73.04 before a long-term bottom is in place. If it dips down to the $72.50-73.04 ranges, but ends the day on a positive note, it will have completed a double bottom formation. This would be a very bullish development and signal that the stock has bottomed out. Consider waiting for a test of the $73.00-$74.00 ranges before jumping into this stock.
As long as it does not close below $73.00 on a weekly basis the outlook will remain neutral. A weekly close above $85.00 would turn the outlook to bullish and signal that the stock has a really good chance of testing the $95.00-$100.00 ranges. Investors could also look into selling puts when the stock trades in the $73.00-$74.00 ranges. If you want the shares to be put to your account, you should sell puts that are in the money. You have a better chance of acquiring the shares if the puts are in the money. If the shares are not assigned to your account, you at least get compensated for your efforts. If they are put to your account, your final price will be well below $73.00 when the premium is factored in.
As the markets are still in a volatile phase, consider waiting for the stocks to pull back to the stated ranges before committing new funds to them. As an alternative you can sell puts at strikes you would not mind owning the stock. If you are bullish on the stock this is a win-win proposition. If the stock is put to your account, you get in at a price of your choosing. If the stock is not put to your account, you get compensated for your time via the premium.
EPS and EPS historical growth rate charts sourced from zacks.com. Earnings history and earnings estimates sourced from yahoofinance.com. Zack's EPS consensus data sourced from zacks.com.
It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.