Cheap Stocks to Buy Now – Exco Resources (XCO)
Price as of 8/14/14: $4.49
Exco Resources (XCO) is an onshore oil and natural gas play focused mainly on shale operations. Its focus is on using horizontal drilling to extract gas from shale formations in east Texas, north Louisiana, Appalachia and the Permian Basin in west Texas.
XCO has underperformed of late — it’s off 15% in 2014 and about 40% in the past 12 months — but it’s one of a number of oil and gas small-cap stocks that could make for great buys in the longer term.
But as I’ve said before, if you’re looking for cheap stocks to buy … you have to admit that many of these players are cheap for a reason.
Exco has been right-sizing itself for several years, including a big drilling rig reduction (from 24 to five) in 2012, as well as shaving 60% of its contractors and a sixth of its full-time workers. XCO has been working on reducing debt to improve liquidity — including a partnership made last year with Phil Falcone’s iconic Harbinger Group — to improve its capital structure.
Unfortunately, the harsh environment for energy stocks seems to have persisted. While earnings for Exco have certainly stabilized and the company is projecting a full-year profit in 2014 on rising revenue, the company trades at 22times future earnings.
The fact that the stock offers a highly sustainable 4.5% dividend is nice … but the underperformance of this stock is certainly a big, red flag for investors looking at XCO among cheap stocks to buy now.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.