As I continued to flip though the various sector charts and reports last night, it was starting to look as though the market was approaching levels where, at least for certain sectors, it might begin to make sense to do a little buying. The real danger right now is that, no matter how oversold or cheap stocks seem, you have to be prepared for an initial decline. The market is very news-driven right now, and nothing coming out of Europe looks good. It appears a default in Greece will be inevitable, no matter what machinations the European Union attempts, and banks there are going to experience serious losses. That is going to hit global stock prices hard, so trying to pick a magical absolute bottom in here would be a dangerous game.
One sector that really catches my eye right now is the oil-services space. These stocks have sold off close to 2009 levels, when the world was pricing for the end of civilization. Concerns about slowing demand in the face of Europe's difficulties and a possible double-dip recession in the U.S. have pressured the oil-services stocks as the price of oil has declined. However, I note that the October crude oil contract closed last night at $75 per barrel, and I believe that is a critical price point. In 2009 the Saudi oil minister said he thought the fair price for a barrel of oil was $75. Yesterday he said the current price reflected a balance between supply and demand. I do not believe the Organization of the Petroleum Exporting Countries (OPEC) will stand for much lower prices for very long.
One of the stocks that really catch my eye at these levels is Nabors Industries (NBR). The stock is trading today just below the $12 area -- less than half of what its price was back in August, before the market began a steep selloff. While the surplus of natural gas does have a negative effect on the company, it has a strong presence in the unconventional gas fields, and business has been slowly improving. International operations have been hurt, as well, by rig delays in Mexico and Columbia, as well as continued disruption in some Middle Eastern markets. Clearing landmines has hampered operations in Iraq, and has depressed profits in drilling operations there.
However, with the stock down 36% for the month and 52% for the quarter, I suspect this is priced in. Shares now trade at just 60% of tangible book value. That's about where the stock bottomed in 2008. I believe you can start to buy the stock at current levels. With volatility high, you might also consider selling the Nov $10 puts. If the stock is a put to you, you would buy it at levels only seen at major bottoms in 2001 and 2008. If it rises, you'll keep a premium of 5% of the strike price for less than two months.
Transocean (RIG) is another stock that has fallen back close to the 2009 lows. The world's largest offshore driller still faces some risks from the Deepwater Horizon explosion, and the court battles surrounding that disaster will likely linger for years to come. However, at the end of June the company had more than $3 billion in cash on the books, and that should meet their capital spending needs until business picks up. The stock currently trades at 1.2x tangible book value, and the dividend yield is more than 6% at the current price. I believe you can buy a little here for the dividend, but if this stock goes below $40 it will become too cheap not to own.
Oil-services stocks have collapsed very quickly as fear of a global slowdown have gained momentum. But no matter how much we talk about alternative energy, oil and gas remain the biggest part of the energy picture, and that will be the case for decades. The price of oil should stabilize near $75, and this could set the stage for a strong recovery in the stock prices of these companies.