Small-Cap Shale for Aggressive Investors

 | Apr 10, 2012 | 1:26 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:




I am by nature a conservative investor. Most of my portfolio is in value stocks with some growth potential, income producing vehicles like MLPs and a good dose of cash after taking some profits after the huge rally of the last six months.

My biggest position in 2011 was Microsoft (MSFT), acquired when it was under $25 early in the year. I do have 10% to 15% of my portfolio allocated to aggressive, small-cap picks and it is by far the most enjoyable part of my investments to manage. The 30% gain I had last year in MSFT provided the biggest part of my portfolio's performance, but I much rather talk of some of my small-cap picks that doubled, even if they provided much less of a boost to overall performance than Microsoft. I think this is simple human nature.

The first quarter of 2012 was extremely kind to my small-cap selections, as I managed major gains in SciClone (SCLN), Crimson Exploration (CXPO) and GeoEye (GEOY) among several others. But I want to talk about two of my picks in one of my favorite areas: small-cap shale. This space has quite a few tailwinds and I have had success with many of my previous investments.

Some of the trends driving this area are:

1.       Technology is driving a huge ramp up in production in myriad shale regions.

2.       M&A seems poised to accelerate as some majors try to establish major acreage in these new energy-producing assets.

3.       Infrastructure is getting built out to deliver the additional production increases throughout the country.

4.       Liquidity seems to be solid as several of the firms in my portfolio have been able to raise funds to be used as capex at favorable terms.

5.       The stocks have been punished by the market due to low natural gas prices, but are increasing their oil production as a result.

Warren Resources (WRES) is significantly undervalued at $3 a share. The stock easily beat earnings estimates each of the last four quarters and is selling for less than 5.5x forward earnings.

It is selling at 5x operating cash flow and it has more than doubled operating cash flow from FY2009 to FY2011. The stock has a low five-year projected PEG (.90), is priced at just 26% over book value and is projected to increase revenues by between 15% to 25% over the next two years.

In fiscal 2011, the company grew proved reserves 46% to 15 million barrels of oil. The five analysts that cover the company have prices targets between $4 and $6 a share on the company.

The median price target on Voyager Oil & Gas (VOG) is $4.50 a share. The four analysts that cover this equity have price targets of between $4 and $5.50, all significantly above Voyager's current stock price. The stock is cheap at 6.5x forward earnings and with a five-year projected PEG of under 1 (.41).

Earnings are projected to grow at an exponential rate over the next couple of years. The company lost two cents a share in FY2011, but is projected to ramp up to 17 cents in earnings a share in FY2012 and doubling that to 37 cents a share in FY2013. Revenue growth is expected to rocket. Sales are targeted to grow more than 300% in FY2012 and close to 100% in FY2013.

Columnist Conversations

BBY is getting smoked this mornings(weak forecast).  The stock is off 8% after opening the session with a...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.