The media and pundits are gleefully celebrating the fact that the markets are hitting new highs, but the truth is that the stock market isn’t doing much in 2014.
Using the S&P 500 as a yardstick, we’re up about 5% this year, but if you broaden out to the Russell 2000, a quick check shows the iShares Russell 2000 Index ETF (IWM) is down a little more than 2% so year to date.
Rather than just look at the overall market, I find it more productive to dig under the indices and look to see which stocks are underperforming and potentially creating bargain opportunities regardless of broad market activity.
Right now, the sector that seems to be creating the most bargains is the energy space. Several energy stocks have dropped this year and now trade at or below book value, and seem to have the potential for high returns going forward:
Energy Stocks: Hercules Offshore (HERO)
Hercules Offshore (HERO) is one of the energy stocks that has seen its stock price fall this year as Wall Street downgraded the stock and ignored the company’s long-term prospects.
HERO stock was hurt by the recession and the oil spill in the Gulf of Mexico the past few years. The company specializes in shallow-water drilling, and that activity was pretty much shut down. While other drillers switched towards the more popular deep-water drilling, Hercules stuck to its basic business and even bought new shallow-water rigs from financially troubled competitors. Now HERO is the largest shallow-water driller in the region, and activity is picking up once again
HERO stock is down a little more than 30% so far this year, as Wall Street has focused on short-term prospects and not looking at how cheap this company is or how far it has progressed in its turnaround. Hercules shares trade at just 84% of book value and have the potential for significant long-term returns for patient investors who don’t mind a little risk.
Energy Stocks: Gulf Island Fabrication (GIFI)
Gulf Island Fabrication (GIFI) is another entry on the list of energy stocks that have seen their stock price punished this year and should be on investors’ watch list right now. This company is involved in fabricating and building offshore drilling and production platforms and other structures in the oil and gas industry.
Despite a 12% surge on June 5, GIFI stock is still down 10% this year and now trades right at book value. Investors are missing the fact that the company was unprofitable for two years in a row but turned a profit in 2013 and should see strong earnings growth the next few years. The company is debt-free and pays a dividend of 1.9%, so patient investors are paid to wait for industry conditions to improve.
Bottom line: Watching what the market does day-to-day or even month-to-month is usually an unproductive exercise for most investors. A much better exercise is tracking and researching issues that have fallen out of favor and that might be bargains with the potential for superior long-term returns. Right now, many of these newly created bargain opportunities are in the North American energy stocks.
Learn more about these stocks in the video below.
As of this writing, Tim Melvin was long HERO.