Trading #1 Energy Stocks - Analyst Blog
27 Mai 2011 - 6:05PM
Zacks
Two interesting energy names have been hot on the Zanks Rank
metrics for the past month: Basic Energy Services
(BAS) and Precision Drilling Corp. (PDS). Both
became Zacks #1 Rank (Strong Buy) stocks in late April as several
analysts following the companies boosted their earnings estimates.
Since analyst data this week brought about quantitative Rank
changes for each -- not once, but twice -- we have a good
opportunity to compare the companies as potential investments or
trades -- and to look at the how-and-why of a stock fluctuating
between being a #1 Rank and a #2 Rank (Buy).
Basic Energy Services provides a range of
services to America's oil and gas producers. Its operations span
the heartland of domestic onshore production from Texas, Oklahoma,
Louisiana and New Mexico to the Rocky Mountain states . Its
services support the entire life cycle of a well, from drilling to
production and, finally, abandonment. The $1.1 billion company,
which has not yet returned to profitability since the 2008
recession, has seen its stock more than triple in the last nine
months, rising from below $10 to a 52-week high above $31.50 last
month.
BAS became a Zacks #2 Rank stock in mid-January
when shares were still trading below $17, as analysts began raising
their earnings estimates up from the recession trough. If you had
bought BAS on that recommendation, you would have made over a 50%
return inside of two quarters as the #2 Rank stuck for over three
months. How did BAS become a #1 Rank stock in late April? Further
upward earnings revisions, that's how. And in the case of BAS, the
boosted estimates really started to heat up in the past few months,
as you can see in the table below.
![](http://static.zacks.com/images/commentary/BAS%20Estimates%20Trend(1).JPG)
The bearish energy forecasts by Goldman
Sachs (GS) and Exxon Mobil (XOM) in April
-- following the crude oil price spike that was driven by
revolutions in oil-rich nations -- sent most energy names into
profit-taking mode for much of May. This trend sent BAS from above
$30 down below $24. But as a #1 Rank stock, that pullback should
have been considered a buying opportunity. And the reversal by
Goldman analysts on their energy outlook brought out the BAS bulls,
sending the stock up 11% on May 25 and another 4% the next day to
close above $27.
On day two of that rally, the Zacks Rank slipped to
a #2 Buy. But Friday morning, it was back to a #1 Strong Buy and
the shares were up another buck in early trade. Why the flip? The
Zacks Rank is a sophisticated quantitative model that incorporates
all changes in analyst earnings estimates over the last 60 days and
weights the data every night according to a proprietary algorithm,
taking into account items like the degree of agreement among
analysts, the magnitude of earnings revisions, and the accuracy of
top analysts. But a total of approximately 4,440 stocks are in the
Zacks Rank universe and only the top 5% can receive the coveted #1
designation.
That means that only about 220 stocks every day can
be #1 Strong Buys. So when a stock is found fluctuating between #1
and #2 in any given week, it is most likely because it is right on
the cusp and competing with over 200 names to display the strongest
earnings revision data for a spot in the top group. For stocks on
the cusp, a slight change -- or a dropping off of old data, or no
new revisions at all -- can knock them up or down in the Zacks Rank
calculations. In the last 30 days, BAS has had a 16% boost in 2011
estimates and a 17% bump in 2012's numbers. And one analyst this
week was able to add a penny to the consensus for 2012, which is
likely what put the stock back in the top group.
Precision Drilling is Canada’s largest
oilfield services company and also has a large and growing
presences in the US. They provide contract drilling, well servicing
and strategic support to customers with over 350 land rigs. As
off-shore drilling faces new regulatory challenges, business is
expected to pick up for PDS and their fleet. Currently profitable,
this $4 billion company sports a trailing P/E of 25 and a forward
multiple of just under 17.
In late December, PDS became a Zacks #1 Rank stock
when the name was trading around $10. But subsequent analyst
estimates pushed it back down to #3 Rank (Hold) or #4 Rank (Sell)
from late January to late April. Then, in the last 30 days, about
three-quarters of the analysts covering the stock raised their
estimates, causing the Zacks Rank calculation to bring PDS back
into the #2 Buy and #1 Strong Buy territory. Today brought a drop
back down to a #2 Rank, but the immediate future still looks bright
for this stock, especially as it participates in the energy sector
rally and builds on strong support from its 50-day moving average
this month. The caveat may be in the earnings growth outlook which
may be leveling out into next year as seen in this snapshot.
![](http://static.zacks.com/images/commentary/PDS%20Det%20Est.JPG)
But the main thing to remember about the Zacks
Rank, other than its incredible consistency and reliability in
predicting stock price movements, is that it is a short-term
trading indicator. Since the focus is on the most recent analyst
earnings projections from the last 60 days, it is looking at what
institutional investors will most likely do with a stock in any
given earnings quarter. Another dynamic to keep in mind is that
energy stocks tend to be affected as much by crude oil volatitlity
as by earnings estimates.
The good news is that if you find the strongest
stocks in the sector, you can use the Zanks Rank for timing signals
and put yourself on the right side of the money flow most of the
time. Buying highly ranked stocks on pullbacks and taking profits
after high-probability events -- like positive earnings surprises,
upgrades, and upward estimate revisions -- is always a good
strategy.
BASIC EGY SVCS (BAS): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
PRECISION DRILL (PDS): Free Stock Analysis Report
EXXON MOBIL CRP (XOM): Free Stock Analysis Report
Zacks Investment Research
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