"We are moving headlong into oil," notes John Reese, who analyzes stocks based on the criteria used by "legendary" investors such as Buffett, Graham and Lynch.
In his Validea newsletter, he says, "My fundamental models indicate that the oil industry is where the best values in the market are." Here's a look at W&T Offshore (NYSE: WTI), which is based on the criteria used by contrarian David Dreman.
"The economy and stock market have gone through a legitimate crisis because of the credit woes, and it takes time for something like that to work itself out.
"But the important thing to remember is that we've been through financial crises before -- even bad-debt financial crises like this one -- and the market has always stabilized and then pushed higher.
"And history has shown that those who can stick with the stock market through down times like these will be rewarded.
"David Dreman -- one of the gurus I base my strategies on -- notes in his recent Forbes column, 'If you pack up now, chances are you'll miss a good part of the next bull market. A large part of the gains are always made in the first few months of one, when market-timing investors are still on the sidelines.'
"Meanwhile, Houston-based W&T Offshore gets approval from the contrarian strategy I base on the writings of David Dreman. Dreman targets stocks with strong fundamentals whose prices don't reflect the strength of their numbers, usually because of fear or apathy.
"W&T is involved in oil and natural gas acquisition, exploitation and exploration, mostly in the Gulf of Mexico area.
"The company has working interests in about 200 fields in state and federal waters, and interests in leases that cover about 2 billion acres. It has taken in more than $1.4 billion in sales over the past 12 months, and has a market cap of $2.7 billion.
"W&T is considered a contrarian stock using this model because its P/E ratio (9.15, based on trailing 12-month earnings) and its price/cash flow ratio (3.24) are both in the bottom 20% of the market. Both figures indicate that, at its current price, the company is being undervalued by Wall Street.
"One way Dreman looks for strong fundamentals is by examining EPS growth. He likes to see companies whose EPS have risen lately, and W&T's EPS over the past two quarters ($1.05 and, most recently, $1.77) meet that requirement.
"In addition, the company's growth rate over the past six months (210.52%) has beaten the S&P's growth rate (4.57%), and its projected EPS growth for the current year is 241.76%.
"That means the stock has been growing earnings more quickly than the S&P and is likely to continue that trend in the near future, meeting another of my Dreman-based requirements.
"Dreman also likes companies that have the ability to raise their payout ratio. W&T's current payout ratio of 13.21% is below its historical payout ratio (13.8%), indicating that the company could raise its dividend a bit in the future, a good sign.
"Another Dreman-type measure of financial soundness is pre-tax profit margin. My Dreman-based model looks for companies with pre-tax profit margins of at least 8%, and considers anything over 22 percent to be phenomenal. With a margin of 31.68%, W&T passes with flying colors."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
8-27-2008 @ 11:28PM
Mike Sanders said...
Very clear and straightforward analysis.
8-27-2008 @ 11:34PM
Mike Sanders said...
You may want to further investigate this company's debt situation, before investing.