Momentum Funds Flock to the Oil Patch

 | May 08, 2014 | 11:15 AM EDT
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What constitutes growth in this market and who has it? I always like to find double-digit growth if I am going to want to buy a stock on the way down, because I know the growth hounds will typically come in at those levels if a stock is in free fall. Many markets like this one have a pound-one-pound-all attitude, so bargains can accrue very quickly.

Now, throughout this tortured period since the great reversal -- which was the rise and fall of (CRM) after it reported a terrific quarter at the end of February -- I have been eying the kinds of growth stocks that the hounds still love.

I have been trying to find stocks that are not just doing well in revenue, but are also putting up some terrific earnings growth. My thinking is like this: Momentum managers don't change their stripes. They just look to different prices for the kind of momentum that fits the market's current motif.

Guess where they have gone? Why, it's the oil patch, where we have companies that are dazzling the Street with incredible numbers. Three I have been focused on -- Pioneer (PXD), Cimarex (XEC) and EOG (EOG) -- have generated perhaps the biggest magnitude of earnings-per-share gains I have seen this quarter. More important, the key metric, production, has been amazing.

First let's take Pioneer. It delivered a clean beat and it did so the right way -- with excellent production and terrific price realization, meaning the price of what it was able to get for its oil. The Street was looking for earnings of $1.06 per share, and the number came in at $1.26 -- a really huge and positive disparity. You are getting 15% production growth, and the company guided to even higher production growth for the rest of the year. Pioneer reiterated that it sees longer-term oil production growth of 16% to 21%. That is much better than what a lot of the tech-and-drug-companies people are guiding toward.

Cimarex, like Pioneer, is primarily a Permian play -- yes, the Texas field that had been left for dead, but is now very much alive because of fracking and horizontal drill. Cimarex took oil-production growth to between 19% and 22%, up from the prior 10% to 16%. That will produce accelerating revenue growth, which is precisely what the momentum funds are looking for. No wonder the stock is up 25% for the year.

But the best is saved for last. EOG has fingers in all the best plays: the Bakken in North Dakota, as well as the Permian and the Eagle Ford in Texas. This company reported astounding 42% year-over-year growth in thousands of barrels per day, and that's just extraordinary. You got a gigantic production-guide increase, as befits how much oil this company keeps finding and delivering. It has done so with very low costs, by the way, because of the excellent infrastructure available and created by EOG.

Now, if you live by momentum growth, you die by it. One of the biggest percentage losers today is Gulfport Energy (GPOR), whose shares have lost 19% in one session. Here's a company that's reliant on the Utica shale in Ohio, a play that has shown incredible county-by-county inconsistency. The company lowered production-growth guidance by 30%, which is dreadful. Plus, this Gulfport is largely natural gas and natural gas derivatives, when the momentum lovers want oil growth. There's no price too low that momentum riders won't jump off from.

There's always a bull market in growth somewhere, and right now it is in the Eagle Ford, the Permian and the Bakken -- and it couldn't happen to a better bunch of companies.

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