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Recent research reports out from a buy-side analyst and a sell-side analyst put price targets on Gastar Exploration (NYSEMKT:GST) at $4.50 per share or higher, at least 26% higher than the current $3.58 per share. These reports came out prior to news of Gastar's recent legal success, which could return an additional $0.42 per share of cash to the company. It could also increase the company's value by that amount or more, if the high rate of return in Gastar's drilling projects is factored in.

The buy-side report is, of course, more intriguing because it is less common to find published buy-side research, particularly on small-cap companies. Investors are familiar with reports that Bill Ackman put out on Herbalife (NYSE:HLF), which have sometimes had a significant impact on a company's stock price. In the Herbalife example, Ackman's report led to an almost 50% decline in the share price. Another famous buy-side investor, Carl Icahn, came out shortly after and boosted the stock with his own positive analysis on the company. But only in the past few months, after a massive stock buyback, has the stock price exceeded where it was at immediately prior to Ackman's report.

The firm that came out with the report on Gastar, Union Square Research, is much less famous than investors like Bill Ackman, but their research has seen more success recently. They initially came out with a $2.49 price target for Gastar when the stock was around $1 per share. And over the course of less than a year, they have been proven substantially right. Rather than taking money off the table, Union Square doubled down recently and raised their target price to $4.70 per share. They cited success in the Hunton, continued success in the Marcellus, and the impact of a massively accretive stock buyback as main drivers of the increased value. And they see potential for further increases in value if there is additional success in the Hunton (at one point in the report a $5.91-per-share value is cited if Hunton wells continue to perform on par with the average wells drilled to date).

Around the same time as Union Square raised their Gastar price target to $4.70, a sell-side firm (which remains nameless as they only released their report to their clients) raised their price target from $4.25 to $4.50. They cited the excellent non-core Hunton sale deal and highlighted that Gastar essentially has no cost basis in the large new acreage position that it acquired from Chesapeake (NYSE:CHK). They see high rates of return in the Hunton and Marcellus and expect the additional liquidity from the Chesapeake asset resale to be deployed into these high rate of return properties.

It is obviously positive for existing Gastar shareholders to see research reports coming out raising price targets and highlighting improvements in Gastar's liquidity position. Unlike the situation with Herbalife, where the buy-side report was hotly contested by another buy-side firm taking the other side, there does not appear to be publicly released buy-side research with a negative view on Gastar. And it appears that the buy-side analyst's observations are also being seen by sell-side research analysts.

Generally, this seems to be part of the process stocks go through after value-realizing catalysts as they trade up to fair value -- and, in some cases, surpass fair value and trade to a premium valuation. The market is slowly building up acceptance of the value created at Gastar, and despite short-term up-and-down moves in the stock, it appears the trend of value creation at Gastar since the beginning of the year is being matched by the rising price of the stock and the improving valuation of the company. Although after the most recent deal and with the recent litigation success, Gastar's stock may have to rise more to simply maintain the valuation multiple it was at prior to those announcements.

Source: Buy Side And Sell Side Think Gastar Is Worth $4.50-Plus Per Share