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  • While Few See It, This Stock Sector Is Getting Risky

    There continues to be excellent activity in domestic oil and gas stocks, especially in the small- and micro-cap categories. Bakken oil stocks are pushing the valuation envelope even further, as many companies are hitting new highs with stronger production and oil prices.

    Recently, in this column, I looked at Triangle Petroleum Corporation (NYSEMKT:TPLM), which bolted higher on the stock market after reporting exceptional growth in production and in its financials. (See "Why the Street Is So Bullish on This Junior Oil Producer.")

    The stock is very expensive, but the price momentum continues; this illustrates the appetite institutional investors have to bid these companies in a rising spot price environment.

    Among large, integrated oil and gas producers, the stock market action is much more subdued because of production issues-declining barrels of oil due to field depletion. Dividend yields are fat, but top- and bottom-line growth is becoming a real issue in the face of declining production numbers. The action for risk-capital traders is definitely in the burgeoning junior producers.

    But like all hot stocks in resources, the action revolves almost 100% around the spot price. This is especially the case with precious metals, where even the most exciting growth stories won't experience a rising share price if spot prices of the underlying commodity are subdued. This is a built-in investment risk with all resource stocks, and it is a disincentive for betting on companies as opposed to the spot price itself.

    The price of oil is holding up exceedingly well, considering the tapered geopolitical tensions regarding Syria. Whatever the reasons why prices are nudging $110.00 for West Texas Intermediate (NYSE:WTI), financial metrics become a lot rosier for junior producers as benchmark prices rise.

    Illustrating the kind of growth available from the Bakken region, Kodiak Oil & Gas Corp. (NYSE:KOG) is producing from the Williston Basin in North Dakota and Montana, as well as the Green River Basin in Wyoming and Colorado.

    According to the company, in its second quarter (ended June 30, 2013), oil and gas sales were $173.5 million. This is way up from sales of $85.8 million in the comparable quarter last year.

    The company said it sold 2.1 million barrels of oil equivalent (MMBOE) in the second quarter of 2013 for a gain of 103% comparatively. Crude oil revenues accounted for about 94% of total sales.

    Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were $131.1 million, compared to $67.7 million last year. Net cash provided by operating activities during the second quarter of 2013 was $118.3 million, for a year-over-year gain of 165%.

    But there are no free passes when it comes to genuine economic growth. Kodiak isn't as pricey as other Bakken oil plays, but it's still expensive. And institutional investors are all over the position, which means that any earnings misses are going to result in a mass exodus.

    Kodiak is now a $3.0-billion company. In July of this year, it was a $2.0-billion company.

    For the investment risk, a little exposure to the domestic oil and gas boom is worthwhile. Just remember that everything follows spot prices. Right now, the upward trend for these burgeoning energy companies is intact, but investors still need to keep an eye on the underlying commodity.

    This article While Few See It, This Stock Sector Is Getting Risky originally published at Profit Confidential

    Sep 23 4:57 AM | Link | Comment!
  • Another Earnings Season Suggests Another Quarter Of Slow Growth Ahead

    Another earnings season is upon us and there are already some solid benchmark stocks reporting decent numbers. It remains, however, a very slow-growth environment, and this expectation should be with every equity market investor going forward. The days of three-percent-plus real growth in U.S. gross domestic product (GDP) are gone for the foreseeable future.

    FedEx Corporation (NYSE:FDX) is a worthy benchmark stock. For its first quarter 2014 (ended August 31, 2013), the company did a solid job of increasing its earnings with lackluster revenue growth. Total global sales grew two percent to $11.0 billion. Earnings grew seven percent to $489 million, and the company reaffirmed its full-year outlook with earnings-per-share growth of between seven and 13% over last year's adjusted results.

    Oracle Corporation (NYSE:ORCL), which is still a good benchmark among blue-chip technology stocks, reported anemic revenue growth, similar to that of FedEx, of two percent to $8.4 billion for its fiscal 2014 first quarter (ended August 31, 2013). Earnings grew eight percent to $2.2 billion. The company's sales for the quarter were below consensus.

    Oracle is still a solid dividend-paying technology stock, but near-term, it's potential for high single-digit sales growth is stalled.

    Also recently reporting was Steelcase Inc. (NYSE:SCS), with its results for its fiscal 2014 second quarter (ended August 23, 2013). This company manufactures furniture, chairs, walls, and doors, mainly for corporate and government customers. Consolidated sales for its latest fiscal quarter grew only 1.7% to $758 million. Earnings fell to $27.6 million from $29.5 million in the comparable quarter last year. Diluted earnings per share fell to $0.22 from $0.23.

    General Mills Inc. (NYSE:GIS) reported decent first-quarter 2014 (ended August 25, 2013) earnings that were in line with Wall Street consensus. Revenues slightly beat the Street, and the company reiterated its previous outlook for fiscal 2014.

    And finally, Adobe Systems Incorporated (NASDAQ:ADBE) beat just slightly with its third-quarter earnings results. The company's been in transition to a cloud-based, subscription revenue generator. Investors bid the shares after the numbers. The stock is at an all-time record high.

    But if there is one immediate trend that stands out from early reporting companies, it's that sales growth is once again anemic. Even those corporations that are beating Wall Street revenues estimates are only doing so by a slight margin, and we're still mostly talking about top-line growth in the low single digits.

    Like last quarter, there's not much to be excited about with current earnings reports. Once again, the action in the markets is looking low and slow for the foreseeable future. (See "Why Key Stock Indices Can Still Advance in Wake of New Monetary Policy.")

    And still, the stock market is at an all-time high, which (as it's been all year) is such an odd metric for mediocre financial growth. The monetary expansion continues with no regard to its consequences. As it rarely pays to fight the Fed, this is an equity investor's market with a monetary backdrop favorable for stocks.

    The Fed's decision to maintain current quantitative easing is a catalyst for near-term gains in equities. But I wouldn't be loading up on stocks because of it. I'd stick to what corporations say about their businesses. The trend is that business is steady, but barely growing.

    This article Another Earnings Season Suggests Another Quarter of Slow Growth Ahead originally published at Profit Confidential

    Sep 20 6:38 AM | Link | Comment!
  • Apple Investor Update: New “Cheap” IPhone Not Enough To Break Into Emerging Markets

    There was so much anticipation and hype for new, cheaper "iPhones" to be introduced by Apple Inc. (NASDAQ/AAPL) on September 10-but something went astray. It was akin to waiting with bated breath for a big moment to happen and then nothing materializes.

    Prior to the announcement, cheap iPhones were going to take over in the emerging markets and China, where consumers just don't have the means to pay that much for a smartphone.

    But since the announcement launching the next generation iPhone, the share price of Apple has retrenched over 10%.

    Here's the problem: Everything seems great for the new "iPhone 5S," which is much more powerful and twice as fast with the 64-bit "A7" chip. The 5S may be a better iPhone, yes, but the lack of selling has to do with the "iPhone 5C."

    With the so-called "cheaper" 5C priced at $99.00 with a contract, the price tag is still way too steep for lower-income users in the emerging markets, which is where Apple needs to excel. Who cares about America?-Apple is already the boss of smartphones here.

    However, the $100.00 lower cost of the plastic-bodied iPhone 5C could still cannibalize the iPhone 5S sales in the United States and other industrialized countries.

    For the company, the failure to offer a cheaper iPhone 5C, say for under $50.00, was not smart. Apple is clearly going after margins, as has always been the case. In this instance, though, this is clearly not the right strategy.

    Apple should have come out with a super-cheap smartphone to compete with Samsung Electronics Co. Ltd., Nokia Corporation (NYSE/NOK), HTC Corporation, and others in the emerging markets. At $99.00-plus, I doubt the iPhone 5C will gain much traction in the emerging markets.

    All Apple had to do was look at Nokia and Samsung's strategies in the emerging markets and realize it cannot be about margins in this space, but rather it needs to be based on the price point.

    So Apple disappoints investors, and the subsequent reaction should not have been a surprise. And until Apple does lower its price or launch a cheaper iPhone, it's going to be tough for the company to make way outside of the U.S. market.

    Given this, I would gravitate towards Samsung over Apple. I may even take a long look at Microsoft Corporation (NASDAQ/MSFT) after its recent proposal to buy the cellular business of Nokia. (Read "And the Loser in the Smartphone Battle Is…")

    This article Apple Investor Update: New "Cheap" iPhone Not Enough to Break into Emerging Markets originally published at Profit Confidential

    Sep 19 5:04 AM | Link | Comment!
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