Pick Stocks with Pockets of Strength

 | Feb 06, 2014 | 10:30 AM EST
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I heard a commentator on CNBC Wednesday make a good observation around the sentiment change in the markets early in the New Year. In 2013, investors bought the dips. So far in 2014 they are selling the rips.

It is a tale of two markets. In the overall market there is just very little revenue growth right now. In a piece in The Wall Street Journal on Monday, Thomson Reuters was cited as noting that with around half of S&P 500 companies reporting so far in the quarter, revenue growth was running just 1% above year-over-year levels.

This is far below the 4% gains the consensus forecast was calling for in 2014. It is even below the anemic 2% increases of 2013. With margins at/near all-time highs, it is hard to see much earnings growth if revenue does start to come in at more robust levels.

There are companies, however, that are posting impressive sales increases. The problem is that most are also trading at sky high multiples. Investors in Amazon (AMZN), 3D Systems Corp. (DDD) and Twitter (TWTR) know from recent experience how pain can be inflicted on these types of holdings on any kind of disappointment.

Prudent investors should look for pockets of strength that are showing solid revenue and earnings growth but also have reasonable valuations. One such pocket is some of the domestic exploration and production companies that have pulled back recently and are offering solid entry points at current levels.

The story behind the huge domestic energy boom has not changed much in the New Year. West Texas Intermediate oil prices are still near $100 per barrel and improved drilling technologies continue to lower well costs. Even natural gas prices are significantly above year-ago levels.

I added the firm Oasis Petroleum (OAS) earlier this week at under $40 a share. Shares were down over 5% after the company announced Tuesday it was expanding its drilling program and capital budget for 2014. This was taken as a negative by the market even though it also means additional production this year as well. The stock is now down 25% from its highs in late 2013. This looks like an overreaction and a good buying opportunity.

Earnings are tracking to almost doubling to just under $3 a share in 2013 on the back of better than 65% increase in sales. There is another 15% to 20% gain in earnings projected in 2014 as revenue again rises 40% to 45%, according to the current consensus. Given growth path, stock is cheap at 11x forward earnings. The shares are also more than 40% below the median price target held by the over 20 analysts that cover Oasis.

Devon Energy (DVN) is my favorite "mid-major" E&P play to begin 2014. I also added shares to this holding this week. Devon reminds me of where Hess Corporation (HES) was early in 2013 before its stock made a huge run. Like Hess, Devon is rationalizing its operations although this has not been rewarded in the marketplace yet.

In the fourth quarter of 2013, the company announced it would partner with Crosstex Energy (XTXI) to combine their some of their midstream assets and spin them off into a master limited partnership. Devon also has its Canadian natural gas operations up for sale which could fetch some $3 billion. Finally, the company bought a huge stake in the fast growing Eagle Ford shale region by purchasing GeoSouthern for a reasonable valuation.

Investors have not awarded Devon for these moves to unlock shareholder value but I believe they will in the near future. Thanks to organic growth and its major Eagle Ford acquisition, revenue growth should accelerate to some 20% in 2014 from around 10% in 2013.

After posting an earnings gain of approximately 30% in 2013, current projections are calling for a 40% earnings increase for 2014. Given that growth prospects and its increasingly strategic focus, Devon is too cheap at below 10x forward earnings.

Although 2014 has been challenging to the start the New Year, investors can still find and invest in these pockets of growth which are selling at attractive levels.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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