The stock market has dropped about 10% in the last four weeks or so. Oil is down even more, now trading at about 25% below the highs set in 2012. Many oil stocks are trading 50% below the 52-week highs. But, for investors who have cash and courage, this might be a ripe buying opportunity. Are there many investors left who don't already know that the world is "coming to an end" in 2012, due to the situation in Europe and the recent jobs and economic slowdown in the United States? We have been here before, a big market plunge, worries over Europe and the economy, a mid-year stall in the economy like we had in 2010 and 2011. What usually follows these big corrections and hugely negative investor sentiment is a big rally, sometimes fueled by policy response by central banks. A recent Barron's article sums up the current state of the market and gives interesting reasoning as to why the overwhelming bearishness could give rise to a major short covering and relief rally:
Bespoke Investment Group notes that its log of the frequency of
financial headlines on the virally popular online news aggregator
Drudge Report is again approaching peak levels previously coinciding
with tradable market lows. This suggests a lot of the "de-risking"
process has already unfolded, and that the merest of upbeat
stimuli-with ECB policy makers meeting this week, and the Fed
convening and Greece voting soon thereafter-would touch off a
quicksilver rally, with the tape so oversold and the investor mood
In a badly beaten-down market, oil sector stocks might be the best way to play a major rebound, as it is one of the most oversold sectors. Here are some oil sector stocks that could be poised for quick gains in a major market rebound, which could be coming very soon:
Warren Resources, Inc. (WRES) is an independent oil and gas company that has projects and interests located in California, Texas, North Dakota, New Mexico, and in what could be the very high-potential Green River Basin in southwestern Wyoming. The stock is trading below book value, which is $2.51 per share. The company is profitable and for the first quarter of 2012, Warren earned $3.8 million or 5 cents per share on revenue of $28.4 million. Based on earnings estimates, the shares now trade for just about 5 times earnings. Only about 20% of this company's net acreage has been developed and that is what gives this stock so much more potential upside. In particular, the acreage in the Green River Basin could produce enormous returns, which many investors seem to be unaware of. A report that was released about 3 weeks ago from the auditor of the United States Government Accountability Office states that the recoverable oil in the Green River Formation is equal to the entire world's oil reserves. This is from an independent and credible source and it shows the huge potential for companies like Warren Resources.
This stock is trading for about 50% of its 52-week high, due to investor fears about a market correction, and the big drop in the price of oil. However, this company is fundamentally sound and it could be poised for a big rally. The rebound could be fueled in part by short-covering. According to Shortsqueeze.com, there are about 2.1 million shares short right now. Since this stock has an average daily volume of about 280,000 shares, it could take about eight days of trading volume for shorts to cover their positions. In buying shares of this stock now, investors get a stake in a profitable oil company that has the vast majority of its assets remaining to be developed, which gives it substantial growth potential. When you add in the potential of its Green River Basin acreage, the stock appears to offer investors a possible lottery ticket to boot. Warren shares regularly traded over $12 before the financial crisis and even to as high as about $18. That shows the kind of longer-term rebound potential the stock could have. More recently the shares were trading over $4, and the stock should rebound to at least $3 in the short-term and eventually go much
higher. Earlier this year, analysts at investment banking firm Brean Murray placed a buy rating on the stock and raised the price target to $5.25. This stock seems to have limited downside and significant upside, which makes it a must buy in this market drop.
Here are some key points for WRES:
Current share price: $2.25
The 52-week range is $2.10 to $4.53
Earnings estimates for 2012: 32 cents per share
Earnings estimates for 2013: 46 cents per share
Annual dividend: none
Basic Energy Services, Inc. (BAS) shares are trading at unreasonably cheap levels at just around $11. This looks like an incredible buying opportunity because the downdraft in the stock is not due to any major company specific issue, but rather just extremely exaggerated downward momentum against oil and any stock in the oil sector. The company provides well servicing, pumping services, fluid services, drilling, well site construction and more, to the oil and gas industry. Because of this, it will not see any direct profit margin pressure due to lower oil prices, as a traditional oil company would. The stock appears cheap when looking at a number of metrics: The price-to-earnings ratio is now just about five times earnings, whereas the average S&P 500 stock is around 12 times earnings. The stock trades just barely above book value, which is $9.22 per share. Company insiders are also giving a signal that the stock is deeply undervalued. Multiple insiders recently bought shares and the board of directors also authorized a corporate share buyback. On May 24, the company authorized a stock buyback of about $35 million. On May 17, 2012, Robert Fulton (a director) bought 10,000 shares in a transaction valued at $107,400. On the same day, another director, Steven Webster bought 50,000 shares in a transaction valued at $537,500, and in the two days before that, he bought an additional 125,000 shares, which is worth about $1.5 million. It looks like this stock is at or near the bottom now, and the risk/reward ratio is very much in favor of the upside for these shares.
Here are some key points for BAS:
Current share price: $10.71
The 52-week range is $10.23 to $37.79
Earnings estimates for 2012: $2.03 per share
Earnings estimates for 2013: $2.04 per share
Annual dividend: none
Kodiak Oil & Gas Corp. (KOG) shares could provide strong gains in the long term because it is now priced like a value stock, but the company has high growth potential. It's a rare opportunity when investors can buy shares of an oil company for just about seven times forward earnings, and also get to invest in an enterprise that is seeing earnings growth potential of over 50%. The company recently offered an operations update, which confirmed that it completed three high-working-interest wells in the Bakken, with initial production rates between 2,709 to 3,117 barrels of oil equivalent for each well. The company has set production estimates for 2012 to between about 17,000 and 21,000 barrels of oil equivalent per day. Kodiak's management seems highly motivated to create shareholder value. In 2011, the company grew its proven reserves by almost 300%, to an estimated 39.8 million barrels of oil equivalent. This stock can be volatile, so investors should consider buying on dips and holding these shares for what could be solid long-term gains. Analysts at Canaccord Genuity recently placed a buy rating on this stock and set an $11 price target.
Here are some key points for KOG:
Current share price: $7.29
The 52-week range is $2.43 to $7.70
Earnings estimates for 2012: 61 cents per share
Earnings estimates for 2013: $1.05 per share
Annual dividend: none
Halliburton Company (HAL) shares are trading at undervalued levels,
although it is not as cheap as some of the stock mentioned above.
This company operates globally and it offers a wide variety of drilling, casing and other services to the oil and gas industry. As a leader in the oil sector it should trade for more than just eight times earnings. It offers a small dividend now, however it has room to grow the payout significantly in the coming years, based on strong earnings and a low payout ratio. Halliburton has a solid balance sheet with about $2.76 billion in cash. The company reported strong financial results with earnings of 89 cents for the first quarter of 2012. While Halliburton shares are not as undervalued or as likely to double in value as stocks like Warren Resources or Basic Energy Services, it is a high-quality blue-chip stock in the oil sector, and it does have strong upside potential for more patient investors.
Here are some key points for HAL:
Current share price: $29.12
The 52-week range is $27.21 to $57.77
Earnings estimates for 2012: $3.51 per share
Earnings estimates for 2013: $3.96 per share
Annual dividend: 36 cents per share, which yields 1.2%
Data is sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.