Low-Priced Stocks To Avoid: Round 6

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 |  Includes: AAV, MILL, SD
by: Stan Stafford

Overview

Last week, I wrote Round 5 of this article in which I listed and reviewed three low priced stocks that I believed should be avoided. The stocks I reviewed in Round 5 were Monster Worldwide, Inc. (NYSE:MWW), LivePerson, Inc. (NASDAQ:LPSN), and Ruby Tuesday, Inc. (NYSE:RT).

For Round 6, I will once again focus on stocks that are currently priced at under $10. Also for this round, the stocks being reviewed are all energy stocks. In determining why I find that these stocks should be avoided, I will be looking at each company's financial performance, current valuation, recent trading activity, earnings and future outlook.

Stock No. 1

Advantage Oil and Gas Ltd. (NYSE:AAV) is an intermediate oil and natural gas corporation engaged in the acquisition, exploitation, development, and production of oil and gas in the provinces of Alberta and Saskatchewan, Canada. AAV was founded in 2001 and is headquartered in Calgary, Canada.

Financial Performance

Profit Margin Quarterly 10.63%
Return on Assets -3.20%
Return on Equity -5.58%
Revenue TTM 287.16M
Revenue per share Quarterly $0.44
Quarterly Revenue Growth 33.70%
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AAV has struggled the past few years, having seen its revenue and profit drop significantly from its 2008 levels.

2008 2012
Revenue 644.08M 270.34M
Profit 387.98M 146.33M
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AAV is currently on pace for revenue under $300M this year and profit under $200M this year.

Current Valuation and Recent Trading Activity

AAV has a current price-to-sales value of 2.24x and a price-to-book value of 0.62x with earnings per share of -$0.36.

AAV closed Friday at $3.86, $0.65 shy of its 52-week high and $1.07 higher than its 52-week low. It is trading above both its 200-day moving average and its 50-day moving average.

Earnings

For Q2, AAV reported earnings per share of $0.05. This was significantly better than the same period last year in which earnings per share was -$0.10.

As you can see from the chart below, AAV has struggled recently to maintain any type of consistent positive earnings.

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Company Outlook

AAV has made strides to improve efficiencies related to production and operating costs while improving debt levels; however, I don't feel that there is any evidence to suggest that AAV will be able to return any shareholder value to investors anytime soon. Considering AAV's inability to increase its stock price over the past five years and the fact that it doesn't pay a dividend, I recommend avoiding this stock. If you are looking for a low priced international energy stock, I suggest taking a look at Pengrowth Energy (NYSE:PGH). I wrote about this company in round 2 of this article and feel that it is a better investment with a brighter outlook and comes with a high yielding monthly dividend.

Stock No. 2

Miller Energy Resources, Inc. (NYSE:MILL) is another energy company that engages in the exploration, development, and operation of oil and gas wells. MILL is headquartered in Knoxville, Tennessee and owns and operates wells in the Appalachian region of Eastern Tennessee as well as areas of Alaska.

Financial Performance

Profit Margin Quarterly -53.26%
Return on Assets -5.25%
Return on Equity -10.53%
Revenue TTM 39.55M
Revenue per share $0.30
Quarterly Revenue Growth 57.44%
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While the company has seen recent increases in revenue, you can see from the chart below that its revenue and profit trends have been somewhat flat over the past several years.

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Current Valuation and Recent Trading Activity

MILL has a current price-to-sales value of 7.24x and a price-to-book value of 1.03x with earnings per share of -$0.81.

MILL closed Friday at $6.85, $0.53 shy of its 52-week high and $3.51 higher than its 52-week low. It is trading well above both its 200-day moving average and its 50-day moving average.

Earnings

For its latest quarter, MILL reported earnings per share of -$0.16. This is nothing new as since 2010, MILL hasn't reported one single quarter of positive earnings.

Company Outlook

MILL has increased production and acquired new positions in existing wells, but I think the company is still a ways off before it will be able to consistently post positive returns. Considering the company offers no dividend while shareholders wait, I don't think there is much of a reason to look at this stock right now. As oil/gas stocks are already risky as they are heavily dependent on oil/gas prices, I feel that investors should mainly focus on well run companies that pay safe and steady or growing dividends. As this company doesn't necessarily fall into either category, I recommend avoiding this stock.

Stock No. 3

SandRidge Energy, Inc. (NYSE:SD) is an independent natural gas and oil company that operates in the following segments: Exploration and Production, Drilling and Oil Field Services, and Midstream Services. The company operates properties throughout the US including Oklahoma, Kansas, Texas, Gulf Coast, and Gulf of Mexico. SD was founding in 1984 and is headquartered in Oklahoma City, Oklahoma.

Financial Performance

Profit Margin Quarterly -3.98%%
Return on Assets -10.88%
Return on Equity -41.38%
Revenue TTM 2.90B
Revenue per share 1.07
Quarterly Revenue Growth 7.22%
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SD has shown recent success in increasing revenue and profit, but the company still faces challenges due to its poor margins and fairly significant debt levels.

Current Valuation and Recent Trading Activity

SD has a current price-to-sales value of 0.92x and a price-to-book value of 1.46x with earnings per share of -$2.13.

SD closed Friday at $5.50, $2.30 shy of its 52-week high and $0.98 higher than its 52-week low. It is trading above both its 200-day moving average and its 50-day moving average.

Earnings

SD reported Q2 earnings of $.08 per share, which was $0.11 higher than the estimate and $0.01 higher than the same period last year. Looking at the chart below, you can see that the best SD has been able to maintain is a flat earnings growth rate, with a significant decrease in earnings between 2008 and 2009.

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Company Outlook

There are some positive signs for SD, including its recent earnings beats and the fact that it has seen increased production. However, I still don't see enough evidence to suggest that SD's stagnant earnings growth is going to change that much anytime soon. The stock is undervalued right now, so there's a good chance it will see some price appreciation, but when that might happen and for how long it will happen is anyone's guess. As this stock offers no dividend, I don't think the gamble that the market is going to suddenly realize SD's fair value, is a smart one to make. I recommend avoiding this stock, until it shows a bit more progress in increased earnings.

Conclusion

I can't recommend any of the stocks reviewed above (AAV, MILL, SD) as buys, since none of these companies have shown an ability to maintain any kind of long term "positive" growth in earnings. If one did want to take a gamble, I think SD would be the stock to choose because of its current price; however, I believe there are better bets to be had.

I like to invest in energy stocks that pay dividends to help offset some of the risk associated to this industry. Since none of the stocks reviewed above offer dividends, it would take very solid company outlooks for me to consider them as a buy. I don't believe any of the three companies have outlooks strong enough to offset their recent struggles and inability to return shareholder value. Because of this I recommend avoiding all three stocks at this time. As always, I suggest individual investors perform their own research before making any investment decisions.

Disclosure: I am long PGH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.