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Watermelons on Parade

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December 03, 2006 – Comments (0)

Folks I work with know that I am a value investor. As a result, I have been asked countless times to recommend a stock.

It’s sort of strange really since I would almost be willing to bet, the folks asking for the recommendation have no idea what value investing is.

They ask me only because they know I invest in individual equities. It’s a bit like saying I flew to New York so I must be a pilot.

My response is always the same. I don’t recommend stocks.

Sure, I may tell someone I’m researching a stock, or that I’m playing in a fantasy stock picking league, or any of a number of other comments, but as far as specifically telling someone to buy or sell a stock, well like I said, I don’t recommend stocks.

The simple reason I don’t is because equity investing, unlike investing in a mutual fund, involves individual risk, and I’m not in a position to decide how much risk a person can tolerate.

Equity investing isn’t a game it’s a serious endeavor that requires serious effort.

If an investor has no understanding of the risks associated with individual equity investing, which becomes evident when they ask ME to recommend a stock, can failure be far away?

Becoming a successful individual equities investor isn’t something that happens in month, or a year, or ten years, but something that happens over a lifetime of investing, and the first step to becoming a successful individual equities investor, at least in my opinion, is understanding the risk associated not only with each equity selected, but with the overall portfolio as well.

It is my personal belief that if an investor, whether in stocks, mutual funds, currency, commodities, real estate, coins, baseball cards, or old socks, doesn’t understand the risks associated with that unique investment before plunking their money down, they are destined to failure.

So once the truck is parked, the light bulb is turned down low, the DQ Hunger Busters with Tater-Tots and large Diet Coke are gone, and I’m sucking on some Mother Lewis Fudge watching Wrestle Mania, I forget all about the world of investing, or at least I try to forget about it……

“Hello.”

“Wax, I need your help.”

“Thanks for asking Werner, the family’s fine.”

“Look Wax, I don’t have time, I need your help and I need it bad. I promised Johnny Ray I would get you to recommend a few stocks for him.”

“You what! Werner you know I don’t recommend stocks, you know that!”

“I know, I know. But Johnny Ray said he would set me up with Darla if I would get you to recommend a few stocks, and before I knew it I was telling him it wouldn’t be a problem.”

“Well you need to go tell him it is a problem Werner! One more time, I don’t recommend stocks.”

“Wax, I know, and realize I let my mouth overload my rear end, I know. But here’s the deal Wax. Darla found out that I was trying to help Johnny Ray. It ain’t no secret I been wanting to go out with Darla…bad. Now Darla has told her girlfriends we’re gonna go out Saturday. It’s like it’s a done deal already, and I don’t want to let Darla get embarrassed, I just couldn’t do that. So I need your help. Please.”

“Yeah, you’re a real stand up guy Werner. Call up here in the middle of Wrestle Mania asking me to pull your business out of a ringer because you’re worried about Darla’s feelings. It just makes me want to shed a tear.”

“But just because I’m in tear shed’n mode, don’t mean I’m gonna give you any stock picks for Johnny Ray.”

“Come on Wax, I know you’re researching the Oil Well stocks. By now you have to have a few stocks you could give me?”

…Silence.

“Come on Wax!”

“You do this to me again Werner, and that little head you’re so fond of thinking with? I’m personally gonna cut it off. You got it?”

“See that’s the deal Wax. I don’t got it...yet. But I hope to get it when you give me the stock names.”

“Think Werner! I mean I hate to bring this up in the middle of such delicate negotiations, but you do realize that some things in this world won’t go away with rubbing alcohol and penicillin don’t you?”

“I’m gonna be fine Wax. You are a true friend buddy.”

“You’re so full of it Werner. After I give you what you want, I won’t hear from you till you’re in another bind. Just like Darla isn’t gonna hear from you after you get what you want.”

“That’s not true Wax, not true at all.”

“Oh, really, and why is that?”

“Cause Darla’s got a roommate that’s prettier than she is!”

There are 122 companies in the Oil Well Services and Equipment Industry. Of those 122 companies, I have 62 on my watch list, and of those 62, there are five that stand out enough to warrant additional research...

In an investment world that can, has, and will, go completely crazy based on the price of a barrel of oil, it just seemed odd that a company like Boots and Coots International Well Control, Inc. (AMEX: WEL) would be trading at under $2.

The oil well firefighting and well management company has a trailing twelve month return on capital of 20% and a trailing sixty month return on capital of 48%. Compare that with a Weighted Average Cost of Capital of 4.62% and you start to get a feeling there’s value there that hasn’t yet been discovered.

For the value investor, I believe a reasonable value for the stock is $17. I would put a buy target at $8.50 and a sell target at $18.

For the stock trader, the stock currently has first resistance at $$1.81, second resistance at $1.84, and support at $1.

Grey Wolf, Inc. (AMEX: GW) has no independent assets…but it has subsidiaries, and that’s how Grey Wolf does business. A word of caution here! If you plan to put money into this company, spend whatever time is required to get a complete understanding of how the company’s subsidiaries operate, and just what their business relationship with Grey Wolf actually is.

The company’s subsidiaries had 111 of it’s 115 land based drilling rigs working recently and that’s a number that would make any contract driller’s heart go pitter patter!

Currently trading at just under $7, the company has a trailing twelve month return on capital of 25% and a trailing sixty month return on capital of 5%. Compare that with a Weighted Average Cost of Capital of 4.06% and I have to start to ask myself…where’s the value. To me this stock is a very short-term play, as I don’t believe the company as any long-term value.

For the value investor, I believe a reasonable value for the stock is $18. I would put a buy target at $9 and a sell target at $19.

For the stock trader, the stock currently has first resistance at $7.24, and support at $6.89.

Oil States International, Inc. (NYSE: OIS) derives the bulk of its revenue, 46%, from its oil country tubular goods division. In addition, the company generates 36% of its revenue from its well site services division and 18% from its offshore division.

What are oil country tubular goods, also know as OCTG? Simply put it’s drill pipe that generally comes in three different industry specification forms, 5L, 5CT, and 5D.

OCTG becomes the highway for the crude to get from inside the earth to inside your gas tank. Simply put, no OCTG, no oil.

As long as the price of oil remains high and the demand for oil continues to increase, drilling supply companies, like OIS, should fair quite nicely.

Currently trading at just under $33, the company has a trailing twelve month return on capital of 26% and a trailing sixty month return on capital of 15% versus a Weighted Average Cost of Capital of 4.34%.

For the value investor, I believe a reasonable value for the stock is $67. I would put a buy target at $33.50 and a sell target at $73.

For the stock trader, the stock currently has resistance at $43.87, first support at $32.80, and second support at $28.32.

Parker Drilling Company, Inc. (NYSE: PKD) is a contract driller. Think you found oil in your backyard? Parker is the company that can put the pipe in the ground if you want to get the oil out.

Already have an oil well or two in Papua New Guinea? Parker Drilling has an office there. Or maybe you have your own private body of water and think there may be oil or natural gas underneath it. What you need is a drilling barge, and yep, Parker has those too.

Currently trading at just over $9.50, the company has a trailing twelve month return on capital of 14.5% and a trailing sixty month return on capital of (0.6%) versus a Weighted Average Cost of Capital of 4.23%.

The company is in an extremely competitive business, but glancing at the financial statements gave me the sense that there was something more there, something I wasn’t seeing, something that triggered my sense of wonder.

I mean why is a company that’s been around over 50 years, trading at current levels, especially in an industry directly associated with the world’s thirst for oil?

Recent purchases of Mallard Bay Drilling and Quail Tools may help increase return on capital depending on how long it takes the company to assimilate the operations of the new companies with its own.

For the value investor, I believe a reasonable value for the stock is $25. I would put a buy target at $12.50 and a sell target at $27.

For the stock trader, the stock currently has resistance at $12.44, first support at $8.09, and second support at $7.83.

Patterson-UTI Energy, Inc. (Nasdaq: PTEN) is another contract driller. Actually in addition to contract drilling, the company generates income from its pressure pumping services, and fluids services.

In addition, the company says it makes money from exploration, development, acquisition, and production of oil and natural gas. Perhaps it does.

Does that sound skeptical? Well what makes it sound that way is the amount of assets the company listed. Seems sort of strange huh?

Okay, how about this. The company says it owns 403 drilling rigs, 42 of which are electric and 361 are mechanical.

The company also says it owns 30 cement pumper trucks, 33 fracturing pumper trucks, 30 nitrogen pumper trucks, 17 blender trucks, 10 bulk acid trucks, 37 bulk cement trucks, 10 bulk nitrogen trucks, 42 bulk sand trucks, 15 connection trucks, two acid pumper trucks, and a partridge in a pear tree.

Actually I just made the last part up, the partridge I mean, I have no idea about the pear tree.

But hold on…there’s more!!

The company also says it owns and operates a barite grinding facility with two barite grinding mills which allows the company to grind raw barite into the powder additive used in drilling fluids.

To go along with the grinding assets, the company says it owns 24 trucks, it leases 24 trucks, and that it owns 79 trailers, and that all of these assets are used in support of their fluids services business.

But here’s the thing. With all of these assets and allowing for the pooling of interests merger of Patterson Energy and UTI Energy, the entities that formed Patterson-UTI, how come depreciation is so little changed?

Makes me wonder just how old some of these “assets” really are. Sort of risk thing I guess.

Currently trading at near $30.00, the company has a trailing twelve month return on capital of 41.3% and a trailing sixty month return on capital of 14.1% versus a Weighted Average Cost of Capital of 4.14%.

For the value investor, I believe a reasonable value for the stock is $70. But because I don’t have the warm fuzzies about the company, or more directly, I think investing in this company carries true unnecessary risk.

And since I think that, I would increase my margin of safety substantially, placing a buy target at $17.50 and a sell target at $76.

For the stock trader, the stock currently has resistance at $38.49, first support at $27.25, and second support at $23.72.

“Hello.”

“Wax you aren’t gonna believe this, but I swear it’s true, Darla’s roommate is drop dead pretty. I mean beautiful. So I was thinking…”

Click.

“Wax? Hello? Come on Wax! You there? Hello?”

Wax

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