One of the nice things about living in Orlando, Fla., is that just about everyone you know is going to pass through town at some point. We live southwest of downtown and are fairly close to Disney World, so we end up seeing a lot of friends from all over the world when they come into visit the happiest place on earth.
Yesterday, I met a friend who had fled the snowstorms of Chicago to bring his family in for some fun and sun. We met for breakfast at the Contemporary Hotel and chatted about weather, stocks and the market while the rest of the family attended breakfast with a mouse.
Among other things we talked about were some of my favorite factors when picking stocks. We discussed at length the overvaluation that most individual investors place on liquidity. One of the biggest advantages individuals have is the ability to buy smaller, less-liquid stocks. They are not pushed around by short-term traders, they are not in any of the heavily day-traded ETFs and very few institutions invest in the less-liquid stocks. It is a huge advantage, but almost no one uses it to pile up profits in the stock market.
We also chatted about most investors' inability to buy in a crash. There is a huge psychological inability on the part of institutional and individual investors alike to buy when prices are plunging. It is far easier to buy when the outlook is rosy and prices are climbing, but in reality that's usually a better time to be selling. Part of the conversation was about investing in companies where management has a lot of skin in the game and has the same interest in rising dividends and stock prices that we do as an outside investor.
When I got back to the office, it occurred to me that we could take advantage of these two factors to find some energy stocks worth consideration. With prices down 50% since last year, we can certainly say oil prices have crashed. Finding those energy stocks that are cheap and have large insider ownership could help us gain an edge when prices begin a sustained rebound. With a significant position in their own shares, executives of these companies will go to far greater lengths to make sure they survive the difficult environment and preserve their own wealth. As always, I want to buy those that trade at a discount to the underlying value of the assets the company owns.
W&T Offshore (WTI) has oil and gas operation in the Gulf of Mexico off the coasts of Louisiana, Texas, Mississippi and Alabama. They also have some land-based leaseholds in Texas. The stock is down over 50% in the past year and 30% in the last three months as oil and gas prices have fallen. Analysts have been lowering their earnings expectations and ranking for the stock in the past several months.
While the near-term outlook for U.S. exploration and production companies is bleak, it is worth noting that the managers and directors of this company own more than 50% of the shares. They stand to lose a combined $235 million if this company doesn't survive and recover. Several officers and directors exercised options in December and kept the bulk of the shares, increasing their stake in the stock. WTI shares trade at just 70% of book value right now, so they are cheap on an asset basis.
Triangle Petroleum (TPLM) has exploration and development operations in Montana and North Dakota, a region that is going to see significant production decline if oil prices stay at very low levels for an extended period. The stock is down 50% in the last year and the outlook for 2015 has been lowered by Wall Street analysts. I suspect the people overseeing the firm will do everything in their power to help the company to survive until oil prices recover and they can thrive again. If they don't, they stand to lose about $132 million, as they own 27% of the company. The stock trades at 85% of book value, so it is an asset-based bargain at current levels. If oil prices do begin to recover the shares could easily double from the current levels.
The prices of oil stocks have crashed pretty much across the board this year. Those whose owners have a significant portion of their net worth tied up in their company are on the same side of the table as outside investors and will do everything possible to right the ship and be in a position to prosper when oil prices reverse direction.