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.
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. * The chart has remained within a moderate range of its latest closing price for 52 weeks and RSI shows no sign of bullish nor bearish divergence. I give this chart (0)
2. ANALYSTS- read analyst reports but come to your own conclusions. If the consensus is favorable, 1; if unfavorable -1, and mixed 0. *Analysts have recently been fairly bullish on WFT with 10 strong buy, 8 buy, and 13 hold. I am quite optimistic for the short to mid-term (+1)
3. INSIDERS- if the people that know the company the best are not buying it, why should you? * The stock has slipped since the purchase of 10,000 shares by the CEO on May 17 and now lies just slightly below his purchasing price. Why would he do so if there were no upside? Unforunately he has been the only one since to acquire a significant volume. (0)
4. MANAGEMENT DISCUSSION 10-Q AND 10-K- 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. *WFT reports on its many diversified energy products and services segments, all of which have been severely disrupted by the Gulf of Mexico spill, a 4 year corruption probe (unresolved), and a recent $500 million accounting error. Within the past three years revenue has increased but income has fallen significantly with income taxes playing a large role in that. (-1)
5. 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. *The market has had a steady run for the last few weeks but was overbought and has recently started to depreciate. With much less than expected Labor statistics, a never ending euro-crisis, and a flock of investors into “safe havens” such as gold and treasuries, make it seem like the risks are greater than the rewards. (-1)
6. SECTOR OUTLOOK- buying a good stock in a bad sector can be a humbling experience. *Goldman Sachs recently reported that the energy sector has been outperforming this last week, and the investment bank is looking for that trend to continue. With competitors such as Halliburton and Schlumberger both standing out and oil prices continuing to rise around $100 a barrel this sector is positive while margins remain high. (+1)
7. CASH FLOW- cash flow is more accurate than earnings. Earnings can be more easily manipulated.*The company generates a lot of money from continuing operations. Cash flow is up for the year but has fallen a remarkable amount in the latest quarter and is below earnings. The company is spending large amount each year for reinvestments due to the increasing amount of depreciation on its inventory, management is hesitant to answer any questions concerning what a normalized percentage of operating income is devoted to reinvestments because earnings are released in less than a week and they would like to remain silent. (0)
8. PEG RATIO- it’s good to find a company growing faster than it’s multiple. *PEG ratio is .50 indicating the stock is cheap relative to its estimated futue earnings. (+1)
9. 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. * ValuePro marks the intrinsic value of WFT between $26 – $33. Compared to its current price of $18.69 it remains much less than its DCF and appears to be a bargain. (+1)
10. CATALYST- what’s going to change the status quo? *Although there have been numerous uprisings in the Middle East that have affected the oil industry, the ramifications are much less than one might think to the companies. The large purchase by management signal there could be better business activity in the near future but the legal battles now pending could have a material adverse effect on the business, financial condition, and liquidity or results of operations. (0)
Conclusion: Weatherford International is a large oil and gas company that provides a wide range of products and services around the globe. The company is somewhat an underdog by size compared to other companies in its sector but has potential for growth while the other big names may have already reached their limit. A $500 million accounting error and current allegations regarding corruption in the middle east have caused loss of confidence for the short-term but over the long run I believe WFT is a buy and so does the CEO. Unfortunately management refused to answer questions due to their earnings report being released soon. Final Score : (+2)