Although their risk profiles are different, you ought to hold them only as part of a properly diversified portfolio. Heres why.
The Rise: LookingForA Reliable Macro Play
These three stocks have risen a lot in the last month of trading.
Brent crude hit a 2015 high earlier this week, whenit traded above $63 per barrel. As oil prices get closer to my 2015 target of$80 per barrel for Brent, the obvious question is whether higher oil prices justify such a sharp rally in the prices of these three shares the same question applies to many other oil stocks, of course.
Premier Oil isnt in a bad shape, and its shares are not expensive, based on fundamentals and most financial metrics so the answer may well be yes, but only for opportunistic traders.
Things are a bit different for Ophir and Tullow Oil.
Premier Oil: On Its Way Up?
Since mid-March, the stock has risen 27%, and is up 6.2% year to date. Its one- and two-year performances read -43% and -50%, respectively. You may be entitled to think that Premier Oil has bottomed out, but consider that its $3.6bn enterprise value more than doubles its market cap, which signals high levels of debt on the balance sheet.
A shaky capital structure isalso reflected in Premier Oils relative valuation, based on sales and adjusted operating cash flow multiples at 3x and 5x, respectively. In 2016, revenue will likely be lower than in 2012, and its hard to say why you should pay more than 20x forward earnings to buy the stock now although, in truth, thats the multiplePremier Oil could fetch if it was taken over.
Ophir Energy&Tullow Oil
Some equity investments are just like junk bonds:Ophir Energy&Tullow Oil belong to thiscategory. Junk doesnt mean that they may not turn out to be good investments eventually; it simply means that they carry a huge amount of risk.
Since mid-March, Ophir has risen 31%, and is up 13% year to date. Its one- and two-year performances read -28% and -58%, respectively. By comparison, Tullow Oil has surged 34% in the last four weeks of trading in spite of the rally, it is down 3% for the year. Its trailing one/two-year trailing performance isabout -50%.
Ophirs balance sheet isnt loaded with debts, but the problem is that aggregate losses in the last three years are almost a quarter of a billion dollars, and Ophir is unlikely to be in the black for a long time, ifbullish forecastsare correct; and if these forecasts are wrong, the fall could be really painful thats how it tends to be in these situations. Ophir needs between $300m and $500m a year in heavy investment, and thats stuff for a bigger oil producer.
As far asTullow Oil is concerned, its level of indebtedness is way too high, and neither its trading multiples nor its forward yield point to value right now.
There’s lots of talks about the bottom of the cycle in oil prices: in truth, oil prices could easily plunge to $50 a barrel in a flash — and then, of course, you’d record massive losses on your investment with these three names!
So, for the time being, I suggest you invest in less volatile and cyclical companies, selecting stocksthat still trade wellbelow fair value and are much more likely to reward you with aggregatecapital gains north of 40%in the next 24 months.
Want to know more abouthigh cash flows, low debts and attractive valuations?
Click here right awayand download our freereport right now!
A powerful return and even more to come?
Sometimes you have to scratch beneath the surface of the stock-market to find lesser-known companies that still have lots of room to grow
Our team of top investors have discovered what theyre calling a Fast-Growing Pharma Play with Breath-Taking Potential — the shares have already delivered a powerful return over the past few years, and they believe there could be more gains to come.
and may make savvy investors who get on-board now very rich in the years ahead.
To find out the name of one of The Motley Fools Top Small-Cap Stocks — and to discover why our analysts are so excited — click here to read our exclusive analysis for FREE!