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WildHorse Resource Development: Leaders Vs. Laggards

Taylor Dart profile picture
Taylor Dart


  • WildHorse Resource Development is up 40% over the past 4 weeks and has soared to new all-time highs.
  • The company has built up the second largest land position in the industry in the Eagle Ford shale, with over 400,000 acres of prestigious drilling area.
  • This articles discusses the value of buying leaders vs. laggards in an industry with exact examples.

In a market that's been rather tricky to navigate the past few months for most investors, the oil stocks have provided a bit of a safe haven as many of them have seen strong performance. While the S&P 500 (SPY) is up 1.5% since the week of February 9th, 2018, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is up nearly 20%. This has been helped by the price of oil (USO) which has soared from $59.00/barrel to $69.00/barrel over the same period. The issue is that while XOP has seen a strong move off the February lows, not all oil/gas stocks are created equal. Many analysts and investors favor the stocks that are down in price the most as they believe they have the largest potential to increase in price. This is extremely flawed thinking. Rather than looking for the stocks down the most from their highs, one should be looking for the stocks that are the closest to their highs and have come down the least. The "buy low, sell high" crowd is sure to come after me with pitchforks for this statement, but the article below details specific examples of why "buy low, sell high" is not as effective as "buy high, sell higher". One has to look no further than Sanchez Energy (SN) and WildHorse Resource Development (NYSE:WRD) and the massive difference in their performance over the past month for proof of this. Based on WildHorse Resource Development asserting itself as a leader, I have gone long the stock at $19.58.

One of the most common mistakes I see investors and traders making is buying the laggards in a group vs. the leaders. I believe the reason for this is because it is much easier to buy things that are cheap than it is to

This article was written by

Taylor Dart profile picture
"A bull market is when you check your stocks every day to see how much they went up. A bear market is when you don't bother to look anymore."- John Hammerslough You can access more in-depth research, my current portfolios, new positions I am entering/exiting, and proprietary sentiment indicators for gold miners in my newsletter below.  Returns Link: https://imgur.com/a/6fcWjD6Subscription Link: https://buy.stripe.com/3cseV37nl9Y7dUcaEI - Disclosure: I am not a financial advisor. All articles are my opinion - they are not suggestions to buy or sell any securities. Perform your own due diligence and consult a financial professional before trading or investing.

Analyst’s Disclosure: I am/we are long WRD. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (52)

MyFairShare profile picture
Taylor, the guidance you provide for selecting potential winners is full of wisdom, as usual. So pleased that I caught the right wave this time, with Wildhorse. By the way - The Harvey Weinstein comparison works well. Thanks for explaining your reasoning so logically. Your newsletter has helped me improve my stock picks.
Just announced that they beat income expectations by $0.13 for Q1. I hope you guys didn't take profits too early!
Taylor Dart profile picture
Just going through report now. I took another 1/8 of my position off at $28.20 for a 44% gain, holding the remainder with a stop 25% below market prices. Have 1/5 of my initial position left purchased at $19.58 four weeks ago. Will be interesting to see how it acts tomorrow. Quite a run-up into these earnings so I'll be curious to see if some of the exceptional results were being priced in to today's gap.

Would love to see a new base built at this higher level for a few weeks to add back to some of my position.
Taylor, Interesting article. Do you have a price you would considering adding more shares?
Taylor Dart profile picture

Thanks for the comment. Not at this time, I think it is a little extended and it would be constructive if it could build a new base. Over the next couple weeks it should show if it's going to provide an add point but I can't even speculate on what that would look like yet.

Sometimes your theory is correct, but sometimes not. I remember you wrote an article not too long ago on the mining company TGB recommending a buy at about $2 - it is now about $1 (figures are approximate). I know you will reply about the need for the application of a stop-loss etc. etc. but that leader was clearly a very poor laggard heavily in disguise. Fundamentals do matter considerably.
Taylor Dart profile picture
Hi User477,

I think that applies to everything in the stock market. Nothing is certain or works 100% of the time in the market or it would make it very easy to operate in the market.

Right within the article on TGB I said my exact stop was at $2.08, I was out well before it dropped through $2.

Even if you are right on less than half your endeavors in the stock market, you can be extremely profitable if you have a safe-guard for limiting the losses on those that go awry like Taseko.

For every Taseko there are 2 Kirkland Lake, Viper Energy or Wildhorse Resource. It's impossible to know when a leader is a laggard in disguise as you've suggested, even the leaders with the best fundamentals may have topped in their earnings cycle. Stops are always required.

I'm not sure how it's relevant really and I've never said that fundamentals don't hold any weight, but TGB was strong fundamentally so it doesn't help the argument anyways. There will always be exceptions to the rule, the key is losing as little as possible on the exceptions.

It would be akin to saying "Ya but I played pocket Aces in poker last week but lost the hand, so I'm not playing that hand again". That would be very silly. Just because you have an edge it doesn't mean it's going to work every time, but it does mean that it will work more often than not. That is how you consistently make money whether it be poker or the market - you do something over and over that has a probability of 55% or greater of working.
TopDoggie profile picture
I play in tournaments with a guy. He usually makes it to the money table. He plays AA extremely weak. He is convinced that the hand is bad luck because of a couple bad beats. I don't get it. The brain has a tendency to forget all the time you win with them because you are supposed to. It will remember every time you get beat.
Thoughtful commentary here - thank you. And as usual, wise counsel from Mr Dart. (Does contrary-contrarian ever apply to your thinking?! ... going against the contrary-media sentiment when momentum is the single-most powerful factor at that time.)
Taylor Dart profile picture
Hi Gsgold,

Thanks for the comment. Can you elaborate or give a specific example? Not sure I understand. If you're suggesting what I'm thinking I do simply sell into momentum when I feel that we've hit a "climax top". I sold Aphria on the way up in January right before the peak and cautioned that pot stocks were likely in a short-term bubble there. It's an art though and sometimes I can get it wrong.
FWIW the analysts at Raymond James, who have been covering WRD since its IPO, bumped up its price target from $26 to $38 on 4/24. So they're still seeing 50% upside, and that's just their base case. The bull case is closer to $60.

They've been right on WRD so far. I've been a buyer since the $11 to $12 range and will not be looking to reduce my position for a while.
While WRD has clearly performed better over the time period in question. Today's losers can often be tomorrows winners in the market. I would not be surprised to see SN start outperforming WRD over the next couple months. SN is beaten down and leveraged but they also leveraged to a recovering oil and gas market and should rebound and deliver out performance as oil continues to go up.
Taylor Dart profile picture
I would challenge the "often" claim. Losers tend to stay as losers and continue to underperform and winners tend to stay as winners and outperform the peer group. It does happen that losers can be tomorrow's winners, but I don't believe it's often. The 52-week low list generally and more often than not heads to more lows and the 52-week high list generally and more often than not moves to more highs.

It's possible that SN outperforms WRD as WRD is likely going to need a rest after its near parabolic run but the point is that they've significantly underperformed during the "sweet spot" of this oil rally where the "easy" money has been made in E&P's. The first round of leaders have emerged and many other mediocre names have already broken out, SN is still treading water. Not a name that I'd be putting in my portfolio. If a stock can't budge while oil moves from $58 - $70 and the sector runs up 20%, it's not something I'd want in my portfolio.
I picked up SN recently after they had their run up to $4 a few weeks ago. After that it did tank after they released their production guidance which was below prior guidance. I break even at about $3.69 with them but they were up nicely today and report earnings after the close. If they are good I would expect another big move tomorrow although some of that will be dictated by Trumps Iran announcement tomorrow which if good for oil could help if not it could mute some of the upside.

SN is leveraged to the upside in oil and gas prices though. There is a lot of leverage on their balance sheet and any improvements in oil and gas prices has a more pronounced effect on them. Another factor in this is roughly 40% of the float is sold short so when the stock starts moving up and you get all those shorts starting to cover SN is going to fly. I would not be surprised to see it over $5 in 5 weeks from now.
Taylor Dart profile picture
Short interest in meaningless if a stock is in a bear market, the shorts have profits to play with and cushion and aren't worried about small trades higher against their thesis.

I would be extremely surprised to see SN at $5 five weeks from on, especially given the fact that it's down over 15% today.
I fundamentally agree, Taylor. I like to buy stocks on weakness and will frequently trade them when they pop. I am increasingly learning to avoid the laggards (which often tie up my monies for a long time) and trade around leading stocks- much more fun and profitable. I still like a good deal and hunt for them, but am hopefully growing more aware of laggards.

Wish I had held onto WRD. I've traded it a number of times but underestimated its strength. I'm looking for another pullback opportunity to trade- it is definitely a race horse.
Taylor Dart profile picture
Hey Bbman,

Thanks for taking the time to comment. I couldn't agree more on the leader vs laggard sentiment.

I've found the best opportunities if searching for "deals" come when value meets momentum. Several papers have been written on the success many funds have enjoyed by employing momentum strategies with value names. I've found them to be slower moves than momentum strategies with growth names, but slow and steady can still finish a race and do well in a portfolio as an addition.

Kicking myself for not holding onto more also but thankful to still have a piece of it. Admittedly I did too and the price of oil over the past month. Only wishing I had taken a few more listens to the conference call earlier, I'd likely have peeled off a little less on my initial sell. Clearly, a company that's executing on their plan.
camrob123 profile picture
I challenge the author to look at more qualities than price momentum as there are many more fundamentals that make up the whole. Also, when referring to cheap or expensive stocks you have to discount price to earnings and growth and weigh it versus the industry competitors as well as book value when you talk about price. Just because a stock price goes up or down does not mean it is cheap or expensive. That's one small technical analysis in a large works of analysis. There are many other factors that go into affect. How many assets do they have that they have not tapped into yet, how old is their equipment, how is their equipment valued, what's their expected price to earnings to growth, did they over pay for their average, are their drilling techniques giving them better returns, etc. Is the stock price being ran up because they've been adding on debt and the price of oil has been increasing? These are the questions you need to answer and much more.
Taylor Dart profile picture
I haven't found any of these things mentioned to be helpful when selecting stocks, especially leading stocks. Leaders always look expensive and trade well above book in most cases. I've been listening to the fundamental guys complain about valuation on Amazon, Netflix and Abiomed for years.

They have industry-leading margins, they have industry-leading production growth, they have the largest land package in the Eagle Ford next to EOG. They have industry-leading earnings growth next to Viper, Callon and Diamondback and industry-leading revenue growth. The list goes on. They're a leader in nearly every metric. I'm not as worried about how old their equipment is or what their book value is as I am with the fact they are working on building out a new sand mine to further efficiencies, they're drilling from larger pads to also further efficiencies and they've been over-delivering and executing on their strategy the past two years.

The stock price is running up because they're a growth company trading at a valuation reserved for a non-growth stock in an industry that's being rotated into. If I tried to buy at 1.5x book or less I wouldn't own any leading stocks, I'd own all the laggards that are in down-trends in most cases. VNOM hasn't traded at under 2x book value in 12 months, it has doubled though while most of the sector laid dormant until recently.
camrob123 profile picture
Yeah, WRD does have some good fundamentals, but it has approached a very lofty valuation now. I would reduce holdings. I bought VNOM very early on and have now reduced at 50%+ gains as it is approaching higher valuation. You could make the argument of holding or buying as the management is the strongest in the business, though.

I'm currently liking SRCI, REI, CPE, and CDEV. While CDEV and REI currently have high valuations, their management and growth makes up for it in the years to come.
Taylor Dart profile picture
Hi Camrob,

As mentioned in the article I have reduced my position to 1/3 of its initial size and have zero risk on the trade. I'm now riding the position in WRD with a wide stop and no risk. Possibly yes on valuation for WRD, but I think that all changes if oil decides to continue it's ascent. Money managers are going to want a bigger piece of this space and already are fighting for a chunk and they'll be looking for the best names to do so.

I also traded VNOM and like it a lot, unfortunately only got a 20% gain out of it and was shaken out late last year near $23.00. I would agree it's the best. Nicely done still being in.

Thanks for the tips on the below names, I'm familiar with most and will check them out.

Enjoying the ~40% stock gain since you sent out the buy signal. Great work and let’s keep shopping for more out performers!
TopDoggie profile picture
Keep it up and might make me rethink strategy
billmasi profile picture
Hi Taylor,

Followers of William O'Neil will recognize the 'Buy the Best' strategy, I'm sure.

Thanks much,

Bill M
Buyandhold 2012 profile picture
Taylor Dart,

I like Wildhorse Resource Development.

I checked it out on Yahoo Finance and mostly liked what I saw.

Trailing P/E is 85.69. BAD
Forward P/E is 12.52. GOOD.
5 year expected PEG ratio is 0.37. GOOD.
Market cap is 2.73 billion. GOOD.
Up 131.88% in the past 52 weeks. GOOD.
Founded in 2013 in Houston. GOOD.
An oil and natural gas company. GOOD.
yeti786 profile picture
Thanks for another interesting read, Taylor!
By the way, how would you compare WRD - going forward - with WLL and DK?
Taylor Dart profile picture
Hi Yeti,

No problem, glad it was of value. All 3 have great fundamentals and technicals, I believe they are all holds but would have taken at least some profit at this time if was in either. I don't believe any are buys as they are quite extended, but I would consider all holds. If I was long any of these names I'd likely have trimmed 1/2 of my position by now and be holding the rest for a free ride with a very wide stop to allow the position room to work.

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