Seeking Turnarounds Here

 | Dec 31, 2012 | 9:30 AM EST
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Regression to the mean is a statistical concept that I find figures prominently in many areas of life. Take football, for example. Last year the Colts and the Redskins were two of the worst teams in the NFL, with a meager seven wins between both of them. This year they racked up 21 wins and a pair of playoff berths. Meanwhile the Giants, the Super Bowl champion, failed to even squeak into the postseason.

This concept also applies to stocks. For instance, Bank of America (BAC) had a few miserable years through 2011, but was one of the best performers in the market during 2012. This type of reversal tends to happen frequently with stocks.

With that in mind, here are two oil-services firms that substantially underperformed the overall market in the past year, but should have a much brighter 2013. Both also have had insider buying recently.

Oil States International (OIS) sells specialty products and services to oil-and-gas companies worldwide. It is unusual among oil-services firms, as a good portion of its business is in providing workforce accommodation services for people working in remote locations. The stock is down some 10% from where it started the year, and is off some 20% from its highs earlier in the year.

 Here are four reasons Oil States is undervalued at $70 a share:

1. The company has beat earnings estimates each of the last six quarters, and the stock sells for less than 9x forward earnings, a discount to its five-year average of 11.9x.

2. A director made a $900,000 purchase 10 days ago, the first insider buy of 2012.

3. The median price target, from the 15 analysts who cover the stock, is $93 a share. Standpoint Research and MLV initiated the shares as a Buy over the past six weeks.

4. The company grew revenue by more than 20% in 2012 due to some strategic acquisitions and organic growth. As for its price-to-earnings ratio relative to growth (PEG), the stock sports a five-year projected reading of 0.51 -- in the attractive under-1 territory.

Weatherford International (WFT) sells equipment and services used in the drilling, evaluation, completion, production and intervention of oil and natural gas wells. The stock has vastly underperformed the S&P 500 in 2012 and is down some 40% from its yearly highs.

Here are four reasons WFT has solid upside from $10.50 a share:

1. Several insiders have bought more than 150,000 shares in numerous transactions over November and December.

2. The stock is selling at the bottom of its five-year valuation range, based on its price-to-sales, price-to-cash-flow and price-to-book ratios.

3. Weatherford should earn just over $0.70 a share for 2012, but analysts project earnings per share of more than $1 next year. The stock sells for 10x forward earnings, a discount to its five-year average of 15.9x.

4. Weatherford has a cheap five-year projected PEG of .50, and sells for just 91% of book value.

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