Over the last four weeks we have seen an amazing bounce in equity markets. Crude oil is now well over the $35 level and looks poised to potentially test $40. Many oil stocks have followed crude’s lead by surging higher; some have had triple digit moves just in the last week.
The recent move has an old saying going through my head: “Nobody ever went broke taking profits” This is echoing through the minds of many right now as investors decide how to position themselves for the rest of the year.
While it seems like a bottom is in for oil, many companies still face fundamental issues they absorbed over the last couple years. If oil stays under the $50-60 area, these companies will still face debt and margin pressures.
Given the recent move in some of these companies, now is the time for the longs to start selling their positions and short sellers to start openings theirs. I am not necessarily saying these companies go back down to lows of the year, but merely pointing out the possibility of a profitable trade.
Will oil run out of steam soon?
Currently sitting at $36.50 a barrel, oil has turned positive for the year after seeing a $26.05 low on February 11th and a high of $38.39 Tuesday morning. This is a almost 50% move that has caused stocks that were severely beaten down to rally to November levels. So did the last three months not happen?
Or are we willing to bet that the oil trend continues lower?
Is the short squeeze over in oil stocks?
Crude oil and stocks in the sector were oversold a month ago. Markets were pricing in defaults and bankruptcies for well known oil names. This created fear across the equity markets which lead to many short sellers to pile on the oil names and drive their stocks down expecting them to fall to zero.
When oil started to bounce of its lows and head towards $30, stocks started to rise and shorts either exited positions or stubbornly added. Over the last five trading days we have seen the stubborn shorts start to cover aggressively as oil continued its rise to $38. In the case of Seadrill (SDRL), shorts have taken a $2 stock to $7. In the case of Chesapeake Energy (CHK) a $1.50 stock to $5.
These examples are just a couple that show the bloody mess short sellers have gotten themselves into.
However, this is bound to end soon. As shorts have covered at absurd prices, there is now opportunity for current longs to exit underperforming stocks, while new short sellers start positions.
Below I take a look at four stocks that have bounced with the oil rally, but might be ripe for a pullback. These stocks all are Zacks Rank #5 (Strong Sell), which tells us the fundamentals are in question and that Q1 earnings might not reflect well upon the current stock price.
Oceaneering International (OII) is a Zacks Rank #5 (Strong Sell) that is a global oilfield provider of engineered services and products primarily o the offshore oil and gas industry, with a focus on deepwater applications.
The company has a market cap of $3 billion with a forward PE of 23 and pays a dividend of 3.62%. The stock has a beta of 1.41, so if a trade is taken on the company, expect it to be pretty volatile.
OII was a $46 stock in October and saw a low of $25.33 in early February before rallying to $31, a gain of 30%. The stock might have a little more to go, but odds are it will pull back hard when oil does. The cart below shows severe revisions of estimates lower, with fiscal year 2017 falling over 50% in the last 90 days.
Core Laboratories N.V. (CLB) is a Zacks Rank #5 (Strong Sell) that provides geological and environmental analysis services and manufactures precise measurement equipment.
The company has a market cap of $5 billion with a forward PE of 66 and pays a dividend of 1.91%. The stock sports a Zacks Style Score of “F” in Value and has a beta of 1.42.
Core Labs was a $125 stock in November that hit a low of $84.50 in early January. Since then the stock has rallied with oil to $119, a gain of 40%. These gains seem to be unsustainable when you look at the lowered estimate revisions the company has seen over the last 60 days. Over the last 60 days, fiscal year 2017 estimates have fallen from $3.58 to 2.26, a drop of 36%.
Halliburton Company (HAL) is a Zacks Rank #5 (Strong Sell) that is one of the world’s largest providers of products and services to the energy industry.
The company serves the upstream oil and gas industry throughout the lifecycle of the reservoir – from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
The company has a market cap of $30 billion with a forward PE of 63 and pays a dividend of 2.06%. The stock sports a Zacks Style Score of “F” in Value and has a beta of 1.42.
Halliburton was a $40 stock in November before making a low of $21.64 in January. Right now the stock sits just under $36, showing an impressive rally of 66%. The stock has come pretty far and investors should expect a pullback soon, especially if they dig into the estimates. Over the last 60 days, fiscal year 2017 estimates have fallen from $2.13 to 1.48. This 30% drop in estimates doesn’t justify a 66% move higher in stock price.
Schlumberger Limited. (SLB) is a Zacks Rank #5 (Strong Sell) that is the world’s largest oilfield services company. Schlumberger employs approximately 105,000 people representing more than 140 nationalities working in more than 85 countries. The company leading provider of exploration and production services, solutions and technology to the international petroleum industry.
The company has a market cap of $96 billion with a forward PE of 36 and pays a dividend of 2.60%. The stock sports a Zacks Style Score of “D” in Value, Growth and Momentum. The stock has a Beta of 1.49.
Schlumberger was an $82 stock in November before hitting a low of $59.60 in early February. Since that low, the crude oil rally has taken investors for a 25% ride higher, back up to $75 a share. The stock seems overdone here as oil starts to run out of steam. Estimate revisions would agree with that assumption with revisions heading significantly lower of the last 60 days.
Oil Stocks Squeezing Higher Summary
If investors are long these four names they should consider selling all or at least half their position. Until the oil move proves it is sustainable, there is no reason not to take profits.
Shorts may start to enter these stocks as their fellow short sellers have been blown out. The same idea from two weeks ago is still there, but the stock prices are much higher. This screams opportunity.
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