May started off well for the materials sector as it led the S&P 500 to its fifth straight record high. But last week's news about China's lagging industrial production brought the sector down, and the sector fell again on Wednesday following the release of the minutes from the Federal Reserve's Federal Open Markets Committee meeting earlier in the month. With the sector's recent performance in mind, we decided to look for materials stocks that are likely to do well in the future.
We then screened for stocks that had rising gross profit margins over the past four years. Gross profit margin measures a company's financial health and is the profit that remains after deducting "cost of goods sold", which includes inventory. Companies with higher gross margins are considered more profitable and have a greater control of their costs.
Finally, we looked for stocks exhibiting bullish sentiment from institutional investors, with significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to outperform.
For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.
1. Warren Resources Inc. (WRES): Engages in the exploration, development, and production of onshore crude oil and gas reserves in the United States.
- Market cap at $210.59M, most recent closing price at $2.89.
- Gross profit margins increased from 57.26% to 67.32% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins increased from 67.32% to 70.36% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 70.36% to 72.84% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).
- Net institutional purchases in the current quarter at 4.4M shares, which represents about 6.44% of the company's float of 68.33M shares. The 2 top holders of the stock are Manulife Asset Management (US), LLC and BlackRock Institutional Trust Company, N.A.
While Warren Resources' first quarter revenue rose by 16.94% to $31.9 million from the same period last year, Wall Street Cheat Sheet reports that the energy company fell just short of the average revenue estimate of $31.94 million. Oil production rose by 3% to 256,000 net barrels compared to 249,000 barrels during the first quarter in 2012. The energy company produced 1.54 billion cubic feet of natural gas during the quarter, reflecting a 25% year-over-year jump from 1.23 billion cubic feet.
The average realized price increased for both oil and natural gas last quarter: Oil went up by 1% from $100 to $101, and natural gas rose 12.6% from $2.85 to $3.21. Cash flow from operations increased by 24% to $16 million, and the company had $11 million in cash at the end of the quarter. fellow small cap peers Abraxas Petroleum (AXAS) had $0, Petroquest Energy (PQ) had $21 million, and Callon Petroleum Co. has $3 million.
Earlier this week, Warren Resources announced its plans to drill 25 new coalbed methane wells in the Spyglass Hill Unit of Wisconsin's Washakie Basin. As a result, the energy company is increasing its 2013 capital expenditures by $15 million to $73 million. The move was motivated by rising natural gas prices, which Bloomberg reports may reach $5 in the third quarter thanks to seasonal energy demand.
2. Penn Virginia Corporation (PVA): Engages in the exploration, development, and production of natural gas and oil in various domestic onshore regions of the United States, including Texas, Appalachia, the Mid-Continent, and Mississippi.
- Market cap at $309.14M, most recent closing price at $4.74.
- Gross profit margins increased from 67.14% to 73.68% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins increased from 73.68% to 76.54% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 76.54% to 80.21% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).
- Net institutional purchases in the current quarter at 6.8M shares, which represents about 14.75% of the company's float of 46.09M shares. The 2 top holders of the stock are First Trust Advisors LP and Citadel Advisors LLC.
In the first quarter of 2013, Penn Virginia Corporation's oil, natural gas liquids, and natural gas revenue totaled $82.2 million. The product revenues increased by 8% sequentially from $76 million, but fell by 0.6% from $82.7 in the first quarter of 2012. Oil, corrosion control in the natural gas stream, and road maintenance expenses contributed to the energy company's $3 million operating loss, which reflects a 96% decrease from the previous quarter's $81.1 million. The operating loss was offset by increased product revenue and decreases in other operations expenses.
Penn Virginia acquired 46,000 acres in the Texas-based Eagle Ford Shale for $400 million back in April. Through the acquisition, the company has expanded its Gonzales and Lavanca Counties presence to 83,000 continuous mineral acres. Penn Virginia also gained working interests in 46 producing wells, which brings its current total well count to 117 wells. The company has indicated that it plans to add 11 wells to the site, with 7 already nearing completion. The newly purchased land produced roughly 3,200 barrels of oil a day in February, which is approximately 58% of the production rate of Penn Virginia's existing Eagle Ford Shale property.
Following the purchase, Penn Virginia's balance sheet had $280 million pro forma financial liquidity and a pro forma leverage ratio of about 3.2X adjusted EBITDAX. In the first quarter earnings call, CEO Baird Whitehead mentioned the potential of asset sales in 2013 and 2014 to further improve Penn Virginia's liquid. The company had $14 million in cash at the end of the quarter.
3. Methanex Corp. (MEOH): Engages in the production, marketing, and sale of methanol.
- Market cap at $4.2B, most recent closing price at $44.28.
- Gross profit margins increased from 11.84% to 13.82% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31).
- For the second time interval, gross margins increased from 13.82% to 27.03% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 27.03% to 28.81% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).
- Net institutional purchases in the current quarter at 5.7M shares, which represents about 6.05% of the company's float of 94.17M shares. The 2 top holders of the stock are Wellington Management Company, LLP and FMR, LLC.
Methanex's first quarter revenue of $651.9 million was the same as the revenue during the same quarter in 2012. The company's year-over-year sales volume rose by 0.8% to 1.8 million tons, with the average price of $412 per ton reflecting a 7.9% increase from the year prior. Production ramped up by 10.6% to 1.057 million tons from 926,000 tons in 2012. At the end of the quarter, Methanex's $726.8 million in cash reflects a 24.4% increase from the same period last year. The company's long-term debt also rose, jumping 30% to $1.146 billion.
Bloomberg reports that global energy demand for methanol is growing at an annual rate of 10% and comprised 37% of overall methanol demand in 2012. As methanol continues to be increasingly used in fuel, Methanex - the largest supplier in the world - stands to continue its streak of record prices. CEO John Floren noted the company observed 10% year-over-year fuel blending growth in China and 3% in Europe and continued strength in methanol to olefins. However, the company must also find a way to overcome its natural gas challenges; last quarter, Methanex had to contend with restrictions in Trinidad and Egypt as well as receiving Argentinean gas on a toll basis for its Chilean operations.
Last month, the methanol company announced its plans to shutter and relocate two of its four Chile plants to Louisiana. CEO John Floren expects relatively low North American natural gas prices to expedite the company's benefit from the new plants, which are expected to cost $1.1 billion and will open in 2014 and 2016. Other growth efforts include the reopening of the Waitara Valley plant and de-bottlenecking in the Alberta-based Medicine Hat and New Zealand-based Montuni facilities, which, per Zacks, will increase the company's production capacity by nearly 2.5 million tons by the end of the year.
*Institutional data and profitability data sourced from Fidelity. All other data sourced from Finviz.