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Steve Bauer

Steve Bauer

Steve owned a privately held asset management firm and managed individual investor and corporate accounts as a Registered Investment Advisor - for over 40 years.

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Investing Wisely -- 4 Timely Valuation Shorts in - O and G Exploration and Production

My focus is "Investing Wisely," e.g. taking advantage of the bull/bear cycles as they occur within the overall marketplace. Integrating modern analytics within these "cycles," means maintaining a process of the thorough fundamental analysis of many companies and more than 200 industry groups in my universe. I believe that this discipline provides the necessary clarity regarding the rotation that most all sectors, industry groups and companies goes through - from fundamentally favorable times to unfavorable times and perhaps back again.

"The market is doing what it loves to do." Lately, that means it is both fundamentally and technically very fickle. What the investor often forgets is that what appears to be a fact is, in reality - very creative fiction. The flow of fictional stories being told by Wall Street and the media are so compelling that the average Investor takes the hook, every time. That's a fact and, for me, it is very sad.


The current position of the Oil & Gas Exploration & Production industry group is quite low on my consensus rankings of over 200 industry groups. Therefore, I expect it (O&G - E&P) to begin to consolidate during the time frame of my anticipated pullback. Over the short-term, this industry group does not, qualify as "currently favorable" and the shares of its component companies should likely be (selectively) avoided or perhaps shorted. Over the longer-term I am quite positive. The oxymoron is - as always: Can you afford the current risk/reward ratio?


Valuation/Comparative Analytics:

Table: O&G E&P

In the table below you will see why my approach of valuation offers four rather weak companies that I believe can profitably be shorted in the near-term, however not necessarily now. I have also included one potentially stronger company to compare that likely should be held - at least for the near-term. Remember to be a bit patient before taking positions.

Stock Cur.
Price
My Target Price % Above (+) or Below (-) Cur. Price "Tweaked" PEG P/E Forward P/E Average of Low/High Estimates Divergence (%) -then- "Tweaking" -to get- My Target Price % Multiplier Comments / My Analytics / Weighting: Fundamental (40%) Technical (35%) Consensus (25%) / When my anticipated pullback occurs - lower prices definitely forecasted for all?
Nabors Industries
(NBR)
21.7 - 2% - 3% 1.14 15.2 15.2 - 0 - No Valuation Downside Projection at Time, Long Hold?
Diamond
Offshore
Drilling
(DO)
69.8 - 20% - 25% 2.46 10.4 13.8 - 132% Possible Near-Term Candidate for Short Sale
Ensco
(ESV)
50.1 - 20% - 25% 1.11 15.0 11.5 - 130% Possible Near-Term Candidate for Short Sale
Rowan
(RDC)
32.2 - 15% - 20% 1.15 9.9 12.1 - 122% Possible Near-Term Candidate for Short Sale
Transocean
(RIG)
63.6 - 5% - 10% 0.98 10.9 11.4 - 105% Possible Near-Term Candidate for Short Sale

Notes: Since coming out of retirement in October 2007, I have witnessed a vast change in the "valuation" practices being offered by many financial analysts. The shenanigans and other "accounting practice games" were active before, but have now reached a new height of deception. The general public is often lazy about learning and perhaps naive. The financial analysts know that these characteristics exist and now are taking advantage. It's simple, the average Investor is asking to be told that - "all is ok" so that is what they are being given.

Fundamental valuation, data in today's marketplace, requires that I look at the numbers as being either realistic or creative - which more recently is using "new / funny math." Because of the valuation data inconsistencies, I have adopted an additional procedure that I call "Tweaking the Results." This procedure is sometimes needed to get me back to "realistic valuations." It requires having an eye on the short and intermediate-term price movement of each individual company, and is definitely quite different and not a part of my rather unique technical analysis. My valuations, also considers the two-year - forward P/E data. Using this procedure produces very accurate analytics for decisions at bullish and bearish inflection points.

Most financial analysts determine the price target range by estimating a - future earnings per share and then applying a price-to-earnings "multiple," also known as the P/E ratio. I prefer to calculate price targets (high/low) for both the current and next fiscal year by applying the stock's present multiple to the average analyst's estimates and follow with some foxy "tweaking" of the results.

PEGs: You will note that these companies are carrying low PEG ratios. Normally, that is typical of O&G and does not mean much to my current valuations.



Technical Thoughts

The General Market and many Companies are obviously on a tear but like all such things - that too will come to an end. So for the marketplace, the energy sector and this industry group it is too late to buy and too early to sell.

I remain 100% in cash and am waiting for a Bearish Inflection point to take new positions. That may occur in a couple of weeks or perhaps sooner. The internal topping action is continuing. However, this past week was on balance very positive. That's good if you are forecasting a near-term top. So for this old bearish fox (technically speaking) I'm pleased with the statistics, indicators and charts.

For a current (up to the minute) chart of the Oil & Gas - Exploration & Production and several other industry groups see and then scroll down: http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID4095527

Should you be seeking near-term or perhaps longer-term market guidance / direction, please feel free to Email me, and I will respond promptly.



My Wrap

So while I believe the general market may be in for a pullback, the prevailing question from most investors is: How big will it be? Do I hold my current positions or do I sell? Is there a profitable alternative? Etc. The answer will be obviously quite clear when it (the pullback) is over but an old axiom tells us to be prudent in times like this. You might want to remember that, cash is always an excellent safe harbor. However, if you are a proactive Investor, taking bearish positions may be also being wise.

This is just another (one of many) "bellwether" industry groups to help identify candidates for buying and candidates for short selling as the marketplace "cycles" from bull to bear and back again - over, and over, and over again.

The good news about the current "marketplace" is - we are presented frequent and conservative/low risk opportunities to invest - long, invest - short or to simply to hold cash. For me, this is "Investing Wisely."

 


Source & Data Information: BarCharts, Bauer Capital Management, Bloomberg, Bollinger, CNN Money, Fortune, MSN Financial, RiskMetrics Group, SafeHaven, Seeking Alpha, StockCharts, Reuters, Yahoo Financial, Worden.

 

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