Putting Readers' Feet to the Fire

 | Apr 14, 2014 | 12:30 PM EDT
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I wanted to concentrate this column on readers' suggestions for stocks, which I requested last Monday. The homework assignment was specific, asking for stocks with unrealized value that required patience and a more mid- to long-term perspective. This was the thesis of last Monday's column, and it's what brought winners like BP (BP) in 2010, Tesoro (TSO) in 2011 and Anadarko (APC) just last week. One reader did find a winning idea this time around: natural gas.

Most times, when I ask for reader response, I am rewarded with your terrific insight and intelligence into the energy space -- but not so much this time. While I got an array of stock names, I could not point to one that satisfied the prerequisites I selected, particularly when it came to unrecognized value in the shares.

This I attribute more to the puffiness of the stock market than anything else. The index, which right now needs a solid 10%-to-15% correction, may be the best indicator of why readers can't find much hidden value. In fact, it may be the best one. But before I digress into a column on cautious investing, let's look at some suggestions I got.

Several readers were very taken by the strong moves among Permian players, particularly in Pioneer Natural Resources (PXD) and Cimarex (XEC), and looked to make what Jim Cramer would call a "pin action" play on smaller Permian producers such as Concho (CXO) or Matador (MTDR). Sorry, folks -- these stocks could indeed have more to run, but these are merely smaller-market-cap names in the new, hot shale play. Finding these does not, in and of itself, make for an idea that has intrinsic, unrealized value -- unless you can show me where these smaller players have an advantage over the relative big boys, Pioneer and Cimarex. That's going to be difficult to do, and it's not what I want for an intermediate-term value play.

One reader got more on track by suggesting McDermott Industries (MDR), once the leader in offshore construction and management. This pick has more potential from a value perspective: Shares were as high as $24 three years ago, but are crawling along at under $7 now. Hey, that sounds like value, right? Nonetheless, I'm hard-pressed to find where it is that value lies unrecognized. McDermott has botched its leading position, fallen into deep debt issues and just had to issue $500 million worth of 8% junk-quality bonds to increase liquidity. This stock has consistently led the oil-services indices and ETFs as the worst performer for the last two years, and I don't yet see any reason that will be changing.

Apache (APA) was another idea. But again, and despite some fine portfolio assets, I can't find unrecognized value in the shares -- and I think the Stifel Nicolaus downgrade on Friday was well-deserved. There is a value to be had in Apache at the right price, but to me that isn't at $82 -- it's somewhere in the mid-$70s.

Finally, one of my readers found one sector, if not one company, that portended unrecognized value: natural gas. While we have seen a weather-related super spike in underlying gas price, the shares of many of the dedicated gas players have not backed off at all. This indicates to me that there is value in the shares, and that this will translate at $4-per-MMBtu gas as well as it would at $5.50.

This reader suggests that the impact of liquefied-natural-gas exports is not yet in shares of the producers, and I agree. When Cheniere (LNG) sends its first tanker full of LNG off to Japan late this year, there'll be a new reawakening in gas stocks. While this reader didn't give me specific stocks, I will offer my favorites to you, none of which will surprise regular readers: Encana (ECA), Southwestern (SWN) and Ultra Pete (UPL).

Value is getting tough to find -- and patience will be ever more rewarded -- but there's still some out there if you look carefully.

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