Doghouse Dollars
Doghouse Dollars
By SteveN Lord
Wednesday Nov 01, 2006
Dear American Capitalist Reader,
Here’s a quick word of advice: Don’t chase the blue chips right now. The longer the Dow Jones Industrial Average churns along here with little change and high volume, the greater the likelihood of a correction. Plus, typical of a market sitting at record levels, the merger news keeps coming. Every day we seem to hear of another takeover -- this morning it’s RR Donnelly buying Banta for a cool $1.3 billion, consolidating the printing industry. Meanwhile real-estate firm CB Ellis is buying Trammel Crow. You know the old saying: When you can’t get better, you get bigger.
Instead, it makes more sense to go to stocks and sectors that have fallen from favor for transitory reasons. Small- and mid-cap stocks are a good example, as are oil-service stocks. But there is little doubt that demand for oil-service companies remains very strong -- overall oil production growth is virtually zero while demand skyrockets. Yet since oil prices went through a small correction this summer, oil-service companies have been crushed. This is out of context with their earnings power over the next couple of years.
Case in point: Core Labs (CLB), an oil-service company that focuses on high-tech reservoir description, mapping and management services to global integrated oil companies. Last week CLB reported earnings of 83 cents per share for the third quarter, more than double last year’s total and up 19% sequentially, on record revenue of $145 million. Moreover, margins reached an all-time high, as did cash flow. Yet the stock trades for a PEG ratio of 1.1, reflecting the out-of-favor status of the whole sector. Core’s results speak for themselves, and with the big oil firms trying to squeeze every possible drop out of their wells, we don’t think the oil-service companies will be in the doghouse so very long.
Have a great day.
Steve Lord
Chief Investment Strategist, Trend Investor