The five companies covered in this article have above industry average profitability of over 11%. A company's profitability is conceivably the most important statistic to understand before investing in a stock. Each time you consider starting a position in a stock, you should prudently scrutinize its profitability and earnings information. The reason earnings are so vital to investors is that they tell you about the relative profitability of a company. Earnings per share is an important derivative of profitability. Earnings per share is defined as the net income of a company divided by the shares of common stock outstanding. With the EPS measure, you are looking at the amount of money left over for shareholders. The value is reported after taxes are subtracted.
Additionally, these stocks have severely underperformed the broader market and most are trading significantly below their 52 week highs. I posit we are in for an upswing in energy prices as the global economy continues to recover, driven by a U.S. recovery. This earnings season has been quite impressive. With 40% of the S&P 500 reporting, 75% have beat analyst expectations. This is up from the average of only 60% beats.
Now, simply screening for energy stocks with above average profitability and possibly oversold conditions is only the first step to finding winners that may provide alpha. In the following sections we will take a closer look at these stocks to determine if the sell offs are justified. I will perform a brief review of the fundamental and technical state of each company. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Wednesday's performance for the stocks.
Diamond Offshore Drilling Inc. (DO)
DO was up about 1% Wednesday. The stock has a robust net profit margin of 28.97%. The stock is trading down 8% from its 52 week high which it hit just recently. The company has many fundamental positives. DO has a forward P/E ratio of 13.30 and an EPS growth rate of 23.15% for next year. DO has a price to book ratio of 2.20. The stock is in a well-defined uptrend and has recently bounced off the bottom of its current trading range. In early March the stock performed an extremely bullish technical feat of the golden cross where the 50 day SMA crossed the 200 day SMA. FBR Capital reiterated its outperform rating on the stock recently and raised its price target to $85.
Q1 EPS of $1.33 recently reported beat analysts' estimates by $0.33. Revenues of $768.6 million were down -4.7% year over year; nevertheless beat analysts' estimates by $12 million. The downside for Diamond is they will have several rigs down for survey time in the second quarter. Additionally, two of Diamond's mid-water rigs will be moving back to the Gulf of Mexico in the second quarter. Diamond will have to expense the entire move in the second quarter in accordance with GAAP. The surveys and the moves will affect both revenues and expenses in the coming quarter for Diamond. Although the stock currently looks great, I would wait for second quarter results for a better opportunity to get into the stock.
Halliburton Company (HAL)
HAL was up slightly Wednesday. The stock has a net profit margin of 11.87%. The stock is trading down 42% from its 52 week high. The company has many fundamental positives. HAL has a forward P/E ratio of 8.30 and an EPS growth rate of 13.17% for next year. HAL has an attractive PEG ratio of 0.35. HAL has a price to book ratio of 2.24. The stock has basically been dead money for the entire year; although it is resting at the bottom of its current trading range. HAL has a mean price target by 25 analysts of $47.28 providing a 40% upside for the stock.
Halliburton recently beat analysts' expectations with net income up 23% year over year and revenues up 30%. North American revenue was up almost 40% year over year. Halliburton's margins may take a slight hit due to a dramatic shift toward oil plays rather than natural gas plays due to lower natural gas prices. Oil rigs are up 10% while natural gas rigs are down 19%. CEO Dave Lesar stated, "While these moves are beneficial to us in the long run, they do not come without a short-term impact on our margins." I like the stock here. I see it as significantly undervalued.
Occidental Petroleum Corporation (OXY)
OXY was up 2% Wednesday. The stock has a robust net profit margin of 25.95%. The stock is trading down 22% from its 52 week high. The company has many fundamental positives. OXY has a forward P/E ratio of 9.51 and an EPS growth rate of 12.23% for next year. OXY has an attractive PEG ratio of 0.90. HAL has a price to book ratio of 2.12. The stock has basically been hammered since the beginning of March, dropping from $105 to $90. UBS reiterated its Buy rating on the stock in January upping its price target to $114. OXY will be reporting tomorrow before the bell. I would buy the stock on any pull back and wait for the stock to simmer down prior to opening a position if it spikes significantly on a beat.
SandRidge Energy, Inc. (SD)
SD was up almost 2% Wednesday. The stock has a net profit margin of 11.47%. The stock is trading down 41.56% from its 52 week high. The company has many fundamental positives. SD has an EPS growth rate of 58.33% for next year. SD has a price to book ratio of 1.88. The stock is down sharply since the beginning of March dropping from $9 to $7. Tom Ward stated in a recent interview with Seeking Alpha regarding the swirling buy out rumors, "Well, actually by being a public company, we're for sale every day. But my real answer is that if we really believe we're going to triple our stock price in three years, it would be a difficult time to sell it."
This year Sandridge will drill 1,139 wells for oil and none for natural gas. They are the leader in the Mississippian Unconventional Shale Play with over 250 horizontal wells. Sandridge acquired 2 million acres of land in 2009 for $400 million. They subsequently sold 550,000 acres for $2.3 billion. This play is the highest rate of return play in U.S. The project will be Sandridge's current area of growth until 2019 along with its Gulf of Mexico assets. I like the stock's prospects going forward and would consider starting a position here.
Southwestern Energy Co. (SWN)
SWN was up almost 4% Wednesday. The stock has a robust net profit margin of 21.60%. The stock is trading down 40.47% from its 52 week high. The company has many fundamental positives. SWN has an EPS growth rate of 23.70% for next year. SWN has a price to book ratio of 2.58. The stock is down sharply since the beginning of March dropping from $35 to $29 and trading just 8% above ,its 52 week low.
Southwestern has been crushed by the glut of natural gas on the market. Although some analysts are calling a bottom in natural gas and see an upswing in prices coming. An old adage regarding commodity prices comes to mind. The cure to low commodity prices is low commodity prices. With the glut of natural gas on the market more and more utilities are switching from coal to gas, increasing the demand for natural gas electrical generation. You have to buy low to sell high and I posit this is one of those opportunities. This is a speculative contrarian play.
All these stocks have strong profitability and fundamentals. Nevertheless, I would avoid Diamond near-term due to lowered guidance for the second quarter. These are speculative investing ideas to consider. As usual, use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses.