Friday, June 28, 2013

Three Oil Stocks to Consider

Oil prices have remained strong but a few oil company stocks have taken a dip.  This presents investors with the potential for a solid investment opportunity.  One contributor has tracked and analyzed this opportunity, coming up with three oil company stocks that you might want to consider.

Warren Resources, Inc. (WRES) was trading for close to $3 just days ago, but the market decline has pushed it down to the $2.50 level which has historically been a great buying opportunity since the stock has bounced off that level multiple times in the past year. Since November of 2012, the market and this stock have seen volatility, but in about 6 different selloffs since then, this stock has always been a buy around the $2.50 to $2.60 level.

The company is profitable and it has been growing reserves over the past few years. For example, the latest 10-k filing shows that total net proved oil and natural gas reserves in millions of barrels of oil equivalent (MBoe) grew from 21,617 in 2010, to 22,273 in 2011, to 24,919 as of December 31, 2012. That's a jump of about 20% in just a couple of years and since around 85% of its acreage is currently undeveloped, there could be substantial future growth prospects in terms of reserves and production growth.

ConocoPhillips (COP) shares have also experienced a sharp pullback in recent days but this appears to be yet another buying opportunity. Not long ago, this stock was trading for $64 per share, but the market decline has pressured it back down to just $60. I consider this stock to be in the "buy zone" because it is still in a solid uptrend as evidenced by the chart below, and at an ideal entry point. As the light blue trendline shows, this stock is now at the low end of the recent trading range and yet it still remains in a positive uptrend. That is what makes this stock worth buying now.

ConocoPhillips shares appear to be a low-risk way to gain exposure to oil, and a higher than average dividend. It currently yields about 4.4% and the company has been raising the dividend over time. For example, in 2008, the quarterly dividend was 47 cents per share, but due to consistent increases, it now pays 66 cents per quarter. That is a dividend growth rate of about 50%, in just 5 years.

ConocoPhillips has been reporting strong financial results. For the first quarter of 2013, it earned $2.1 billion, or $1.73 per share. Some of the highlights include: First-quarter total production of 1,596 MBOED. Eagle Ford, Bakken and Permian combined production were up 42% when compared to first quarter 2012.
NGP Capital Resources Company, Inc. (NGPC) shares were trading for about $6.75 just a few days ago, however, the market pullback has punished many stocks, especially dividend-payers. The stock is currently just above the $6 level and it appears to be in the "buy zone" now.

Back in May, the shares suffered a similar sell-off, and then went right back up to over $6.80 per share. The shares seem to be finding support again at the $6 level, and if that is the case the stock could be putting in a very bullish "double bottom" now. The recent pullback seems excessive and investors who have been panic-selling dividend stocks in the past few days, might soon regret it. Even if the 10-Year Treasury Bond now yields about 2.5% (instead of 2%), it still is not enough to pay the bills for most investors. Meanwhile, the sell-off in this stock has pushed the yield to about 10.5%. Hold this stock for the next five years and you might have well over 50% in gains from the dividend payout. Buy a Treasury Bond that yields 2.5%, hold it for five years and you will be lucky to have 12.5% returns. Plus, while bonds cannot grow earnings, a company like this could be positioned to increase the dividend in the future.

Monday, June 17, 2013


Recent selling off of utilities stocks may be presenting investors with a good opportunity to entry into the sector.  

As Gary Cheng reports, Utilities stocks as represented by the Utilities Select Sector SPDR ETF (XLU) have fallen out of favor lately since the share price peaked in late April. The sector ETF has dropped 5.5% in the past four weeks and 10% since its late April peak, making it the worst-performing sector year-to-date. The interest rate sensitive sector is pulling back hard as investors speculate that the Fed may begin to taper its QE3 stimulus program and long-term interest rates begin to rise. Valuation of the group as a whole had also gotten fairly expensive relative to the market and remains pricey at 18.7 times trailing earnings while the sector's earnings are expected to grow just 3% - 5% per year, which is far below the 11% expected earnings growth for the S&P 500 Index.

The economic data released by the government in the past few months supports the notion that the economy is recovering at a slow and steady pace with gains seen in job creation and housing activities. Cheng expects the same pattern emerging in the next few months unless the Fed surprises us with a much earlier tightening time line. There will also be continuing talk about the premature end of the Fed's QE3 program, which will likely further pressure utilities stocks and XLU share price may have additional 5% downside until it reaches a stronger long-term trend line support at around the $35 - $36 level.

It's understandable that some investors may want to shun the utilities stocks altogether in an uncertain interest rate environment.  Rather than totally avoiding this sector, Cheng believes investors should tilt their utilities stock allocation to those names that have good fundamental characteristics and can benefit from a steadily improving economy. Based on data compiled from, Cheng feels that the regulated electric utilities as a group has the best fundamental characteristics in the utilities sector, particularly in lowest debt-to-equity ratio, lowest interest rate on debt, highest cash flow from operations, positive free cash flow, and reasonable valuation at 16.3 times trailing earnings. The electric group was also the only group among the utilities sector to post year-over-year growth in the most recent quarterly revenue.

After careful analysis, Cheng has chosen five companies with solid fundamentals, stable dividend growth, and below market valuation multiples that he feels investors should further examine.
  • Cleco Corp (CNL)
  • DTE Energy (DTE)
  • Idacorp (IDA)
  • Alliant Energy Corp (LNT)
  • Pinnacle West Capital (PNW)

Saturday, June 15, 2013


Reuters is reporting that Office Depot Inc (ODP) investor Starboard Value LP has sued the second-largest U.S. office supply retailer for not holding an annual shareholder meeting to elect directors.
Starboard Value filed the complaint with the Court of Chancery in Delaware, where Office Depot is incorporated.  The complaint states that the company had not held an annual shareholder meeting for 13 months.

Starboard has nominated six people for the 10-member Office Depot board. They cited the lack of experience among current board members and stressed the need to reconstitute the board whether or not its proposed merger with rival OfficeMax Inc (OMX) goes through.

Office Depot announced in February plans to buy OfficeMax in a deal worth $937.2 million. They have not yet decided on the combined entity's name, headquarters or CEO.  The companies are awaiting regulatory approval and will both hold special shareholder meetings on July 10 to seek investor approval.
"The proposed merger provides no basis for the company to deprive stockholders of their right to meet annually to elect directors," Starboard said in the complaint.

Starboard said it was forced to take the latest action as it did not expect directors to be elected at the special meeting.  Starboard said in its most recent regulatory filing that it held about 42 million shares of Office Depot, or about 15 percent of the company's stock.  In addition to Office Depot, Starboard reported a position of almost 8 million shares in Compuware (CPWR), 12.5 million shares of Integrated Device Technology (IDTI), 5.1 million shares of Calgon (CCC), and 7.3 million shares Wausau Paper (WPP).

This lawsuit could potentially drive down Office Depot’s stock price which is currently trading around $4.28.  While that could be a good thing for investors looking to initiate new positions it might not be the best thing for the company considering the stock-for-stock merger deal with OfficeMax.

Friday, June 14, 2013


The New York Times is reporting that on Thursday June 14, 2013, the Securities and Exchange Commission announced that Revlon (REV) had agreed to pay an $850,000 penalty to settle accusations that it deceived shareholders and its directors in connection with a failed takeover in 2009.  To date Revlon has paid roughly $37 million in settlements to shareholders in related private lawsuits but the company has neither admitted nor denied any wrongdoing.

In 2009, during the depths of the recession, Revlon had posted losses for several years, losing market share to competitors, and suffering under heavy debt.  Ronald Perelman tried to solve the company’s problems by buying out minority shareholders and taking the company private. However, an independent financial adviser determined that the proposed deal was unfair to Revlon and the minority shareholders.

So instead of taking the company private, Mr. Perelman sought to improve the company through an exchange offer, a transaction in which the company asked minority shareholders to swap their stock for preferred shares. The deal would have helped Revlon pay off a sizable loan that it owed.  There was a question about the transaction’s fairness, so Revlon asked its independent board members to assess the deal.

Among minority shareholders were those invested in its stock through the company’s 401(k) retirement plan. The plans trustee decided that members could exchange their shares only if an outside investment banker decided that the transaction was adequate.  After evaluating the deal a financial adviser determined that it was unfair and that the preferred shares being offered were not equal to the value of the common stock being exchanged.

According to the SEC, Revlon hid that decision from the retirement plan members.  The company altered the agreement with the trustee to ensure that the trustee would not share the adviser’s opinion with Revlon shareholders. They also misrepresented in securities filings that the board’s process was “full, fair and complete.”

The S.E.C. order described Revlon’s conduct as “ring fencing,” defined as withholding vital information from shareholders that would have helped them decide whether to exchange their shares. As a result of Revlon’s misconduct, the company’s board was unable to fairly evaluate the adequacy of the exchange offer, according to the SEC.

“By erecting informational barriers, Revlon kept critically important information from its board and, in turn, misled investors” said Antonia Chion, an associate director in the SEC’s enforcement division.
Shares of Revlon have risen about 40 percent over the last year. In trading Thursday, the stock rose about 3.7 percent, to $20.64.