Arrrghhh! I utter this all too frequently these days when I'm trying to do basic, fundamental research on companies.
For instance, I have been working on a piece on Harvest Natural Resources (HNR), a component of my Mad Money portfolio. For this, as well, I arranged a private meeting with CEO James Edmiston at the EnerCom conference in Denver last week.
As part of the piece on Harvest, I wanted to do some research on Vaalco Energy (EGY), which is closely comparable to Harvest Natural. Both companies are developing projects off the shores of Gabon, and Vaalco is currently producing in its Gabonian block, a goal for Harvest by 2016. Vaalco also has interests onshore in Gabon and in Angola and Equatorial Guinea, and Harvest is in the midst of attempting to divest its assets in Venezuela. These are actually great assets, and the process is only problematic because of government intervention in that banana republic.
It's never exactly apples-to-apples, but it certainly makes sense to compare one company that is currently doing what another company is planning to do that same thing. Take Vaalco's valuation, based on its current production, and put in some discounting for time and risk, and that is a good proxy for what Harvest Natural could be worth when its Gabonian production comes online in a couple years. That's assuming the company's Venezuelan transaction has closed in the meantime.
Sounds simple, right? So I log in in to E*Trade and get some research on Vaalco in order to run those numbers. The first thing I'd like to do is get an updated balance sheet, so I can do an enterprise value calculation -- that is, market capitalization, less debt, with a few adjustments.
OK, so let's go! First choice, Standard & Poor's Capital IQ. I've been reading S&P's "tear sheets" since the mid-1980s, when they actually were sheets that one would pull out of a binder. Memo to S&P: It's not 1985 anymore. The balance-sheet data is only updated as of year-end, and the two data points that are updated as of midyear -- sales and earnings per share -- are not meaningful to the enterprise-value calculation.
But maybe there are some other comparable metrics, and I'll be able to see how Vaalco trades against these as a proxy for where Harvest could one day be.
Alas, that leads to another failure. The comparison table is an absolute joke. It's 11 companies, and only one has a fair-value calculation. A different one has an S&P Quality rating. Also, to call these companies "comparables" is beyond a stretch. Several of the companies listed are master limited partnerships, a structure that is not directly comparable to a common-stock name.
Yet even the stocks listed are not good analogs. Ring Energy (REI), with its assets in the Permian in Texas and Mississippi Lime in Kansas, are comparable to Vaalco? Really? Punching a hole 5,200 feet into the Kansas prairie for $650,000 is the same activity as drilling down 7,000 feet from a platform that is located off the coast of West Africa for $25 million per well? These two business have the same risk profile? Come on.
The takeaway: There is just not enough quality fundamental research available to the average investor, and that adds an unnecessary component of risk to the investing process. The Street founder Jim Cramer wisely advises spending an hour a week on each stock in your portfolio. But after spending five minutes reading the pseudo-research on E*Trade, I quite sincerely felt sick to my stomach.
So, be very, very careful about what you are buying, and try to do as much of your own fundamental research as possible. If you'd like more tips on how I do it, please send me a message and I'll talk you through it.