by Aaron Levitt | January 27, 2014 11:20 am
One of the most common misconceptions for beginner investors is that low single-digit share prices are what make “cheap stocks.” No matter the sector — energy stocks, tech stocks and everything in between — nothing is further from the truth.
Instead, you must look at various metrics such as price-to-earnings or price-to-book ratios to find cheap stocks … and stocks under $10 a share stock can actually be quite expensive, while picks going for over $1,000 can be the real cheap stocks.
However, that doesn’t mean these low-priced “cheap stocks” can’t be a huge source of returns for a portfolio. In fact, the Fidelity Low-Priced Stock Mutual Fund (FLPSX) has managed to beat the pants off of its benchmark indices and produce market-beating annual returns since its inception.
So for investors willing to delve into the world of cheap stocks based on share price, the rewards can be great. In fact, some of the best low-priced jewels are actually energy stocks … and thus members of my favorite sector.
Featuring decent reserves and production along with low share prices, consider these energy stocks to buy now — five names that could be some of your portfolio’s biggest future winners.
First on our list of cheap energy stocks under $10 a share is a company whose fortunes have changed thanks to shareholder and hedge fund activism.
SandRidge Energy’s (SD) founder and CEO Tom Ward was politely shown the door after years of “robbing shareholders blind.” High debt and a series of acquisitions gone bad caused SandRidge Energy stock to fall around 80% since going public back in 2007.
Of course, that’s also made SandRidge one of the cheapest energy stocks out there, currently going for just over $6 a share. Plus, a turnaround could be at hand for SandRidge Energy.
See, SandRidge has recently undergone some major asset sales to right its ship. The energy stock sold its offshore Gulf of Mexico assets to a private buyer for $750 million dollars. While that sale was at a loss — based on the purchase price of those assets — SD now has the cash and ability to solely focus on its onshore unconventional plays. Those include acreage in the Mid-Continent, the Permian Basin, and the up-and-coming Mississippi Lime Field formation in Oklahoma and Texas.
SandRidge Energy expects production to see 37% growth this year by redeploying the offshore capital into its Mid-Continent assets. More importantly, the bulk of that production growth will be higher valued shale oil and NGLs. Overall, that could finally be the catalysts to take SandRidge off our list of cheap energy stocks under $10 as it soars into double digits.
Investors in energy stocks looking for the next big thing in shale should focus their research on the “Land Down Under.” New reports have confirmed that Australia could be the hottest place for unconventional shale gas drilling and fracking.
Plus, you can play that trend without leaving the world of cheap stocks. Magnum Hunter Resources (MHR) is at the forefront of the movement in Australia … and MHR stock can be had for around $8.
While it does have assets in the prolific Marcellus and Utica shales, MHR has chosen Australia as its next big focus. Magnum Hunter Resources recently purchased an equity stake in Perth-based New Standard Energy (NWSTF). That investment will help New Standard in the fracking technology department, while providing MHR access to Australia’s gas-rich Cooper Basin.
Already, analysts predict that Magnum Hunter Resources will grow its earnings by roughly 70% this year as its domestic shale acreage takes off. Any additional boost from its new Australian holdings will only sweeten the pot, making MHR one of the top energy stocks under $10.
Natural gas producer EXCO Resources (XCO) is one of the best cheap stocks under $10 because it’s been attracting all the right kind of attention. Namely, several big-time value investors including billionaires Wilbur Ross and Prem Watsa have loaded up on XCO stock.
The reason? The low share price of EXCO Resources doesn’t adequately reflect the real value of the natural gas it has in the ground.
Like most small-cap energy stocks, XCO is asset-rich, yet very cash-poor. EXCO Resources features strong shale assets in the Permian Basin, north Louisiana and across Appalachia. The bulk of those assets are natural gas producing and about 95% of XCO production is dry gas. With its high debt load and the relatively low price for natural gas, EXCO Resources has had trouble getting those assets out of the ground.
Sensing an opportunity, value hounds have been scooping up shares of XCO stock … perhaps in order to take the company private. In fact, this isn’t the first time EXCO Resources has attracted value investors’ attention. Back in 2010, former CEO Douglas Miller tried to take XCO private at $20.50 a share. Those efforts failed and natural gas began its fall downward.
But now that XCO is one of the cheapest energy stocks at just $5 a share, Ross and Watsa might just succeed and take it private. In fact, they already own about 15% of the company. For investors, this might be one of the quickest plays on cheap energy stocks there is.
Like most of the low-priced cheap stocks on this list, Forest Oil (FST) is in the middle of a major turnaround. That’s because, like many energy stocks, FST continues to undergo a major shift in focus for its production.
The first stop for Forest Oil was selling its Texas Pan-handle delineated oil, natural gas and natural gas liquids assets. Those fields brought in cash proceeds of about $944 million. That much-needed cash will be used to pay down the firm’s hefty debt load and enhance its overall financial flexibility.
That includes fully funding its 2014 drilling program and plowing head first into the burgeoning Eagle Ford shale.
FST continues to add to its acreage in the region and newly tapped wells have begun producing some pretty impressive numbers. Overall, Forest Oil estimates that it will see strong oil production growth for the full year as it has finally begun to overcome the “learning curve” of operating in unconventional assets.
Over the long term, analysts speculate that FST will sell off the remaining chunk of its non-core properties in order to focus strictly on the Eagle Ford. If it’s successful, the current share price of this $3.30 could be more valuable than a winning lotto ticket.
Quicksilver Resources (KWK) is the last name on our list of cheap energy stocks under $10 … and it could also be one of the best rocket-ship plays for rising natural gas. KWK focuses primarily on unconventional reservoirs, such as shale formations, coal beds and tight sands. As such, about 99% of the company’s production comes from natural gas and NGLs.
That fact has punished KWK stock. Remember, prices for natural gas have plunged over the years due to rising North American production.
Still, the key for this cheap energy stock is the long-term trend of rising natural gas prices as the U.S. finally exports its bounty. With new LNG exporting facilities being constructed, U.S. producers will be able finally realize a higher price for their production. That will ultimately benefit KWK stock and its wide asset base. Already, Quicksilver Resources has made some strategic deals with Asian partners to buy its gas in the ground.
And at just $3 per share, KWK stock — like previously mentioned FST — could be worth a gamble whether or not this scenario plays out. As a result, it’s definitely one of the best energy stocks under $10 to buy now.
As of this writing, Aaron Levitt did not hold a position in the aforementioned securities.
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