This is a checklist I use to quickly come to a conclusion on a stock. I score a stock, each line getting a 1, 0, or -1. A stock that scored 1 on each line would be a perfect 10. Buy it!
Some of these items are quite subjective. For example how would I score Cash Flow? If a company’s cash flow is much lower than it’s reported earnings, that raises a flag and I would score it a -1. If there are more insiders buying than selling, I would score it a 1. If there are no apparent catalysts in the near future I would score it a 0 but on the other hand if there is a pending secondary that will put more stock out on the market, I would score it -1.
- CHART- know how to read charts. I firmly believe I can improve the price of buying or selling from an understanding of chart action. A good chart gets a 1, a bad one, -1 and inconclusive is 0 RSI is diverging in a bullish chart so I give this a 1
- ANALYSTS- read analyst reports but come to your own conclusions. If the consensus is favorable, 1; if unfavorable -1, and mixed 0. Analysts are generally bearish on this stock with 2 strong buys, 3 buys, 20 holds and 2 sells. You have to understand in Wall Street speak a “hold” is analyst speak for “I wouldn’t buy this now”. -1
- INSIDERS- if the people that know the company the best are not buying it, why should you? This one gets a positive mention since the CEO recently bought 10,000 shares at prices close to where it is trading now. 1
- MANAGEMENT DISCUSSION 10Q AND 10K- this is the only truthful thing you will read about a company. It’s composed by management, the auditors, and the firm’s lawyers. If all three of them can agree on the verbiage, it’s passed a big hurdle. Read it carefully. Pay particular attention to the Risks, Litigation, and Related Transaction sections. These are the things you will wish you had taken the time to read if something goes bad with your investment. The Company has three reportable segments, sub sea and well enhancement, drilling products and services, and marine. The well-known delays in permitting in the Gulf of Mexico have hurt operations ( decline of 47% in the Drilling products and Services Segment) although revenues involved with greater safety procedures have aided that shortfall somewhat. For the most recent quarter ending 3-31-11, revenues increased year over year but income declined. -1
- MARKET DIRECTION- 80% of stocks follow market direction in the short-term. This is your read on the market. Don’t have an opinion, it’s a 0. Market is near term oversold but I’m not decisive here. Give it a 0
- SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience. SPN is a large oil and gas services company. This was one of the strongest sectors of the market this year.but the last three months have not been positive 0
- CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated. Cash flow rose in the last quarter and is nearly 10 times earnings. The company depreciates a large amount. This was primarily due to accounts receivable management and income tax payments. The company looks cheap on a multiple of cash flow less than 6x but I believe the depreciation numbers are real and cannot be discounted. I give this a 0
- PEG RATIO- it’s good to find a company growing faster than it’s multiple. Peg Ratio os 1.29. Anything less than 1 is a positive. I give a -1
- VALUATION- contrary to popular opinion, valuation does matter. Use a discounted cash flow analysis. If the stock is trading for substantially less than its DCF, that’s a 1. According to inputs from Valuepro intrinsic stock value is $16.34 where as S&P using two models pegs it between $32 and $40 Give it a -1 as it’s too close to its ISV.
- CATALYST- what’s going to change the status quo? My guess this is the secret to why the CEO recently bought stock on a pullback. There could be a good pipeline of business developing the Gulf both from well remediation intervention and new drilling activities. +1
Conclusion: Superior Energy Services is a global company and will be highly sensitive to the prices of oil and gas. It has three operating divisions; sub sea and well enhancement, drilling products and services, and marine. The well-known delays in permitting in the Gulf of Mexico have hurt operations but they may be coming to an end and could actually be a net positive going forward. The final score is -1. It might be good for a trade (I’m pretty sure it is and I’m taking the money and running but I’m not committing to it. )And I admit I’m obviously missing what the CEO saw when he bought 10,000 shares recently. If the net operating margins return to 17% levels as they did in 2006-08 the stock could be worth closer to $70.
Trading the markets is a humbling experience. I hope this handy checklist makes it less so.