I can always tell how my stock picks and ideas are doing, just by counting emails. When everything is working as hoped, I get very few emails about a stock or sector that I suggested might be a bargain. When something is not working, my inbox explodes with emails about if, what and when is happening to the stock, and of course a few that cast aspersions on my IQ and heritage. I could probably turn email count into some sort of oscillator. When the flood of questions and concerns begin to peak, it is usually a sign that the particular idea is about to reverse course.
Without ever looking at a computer or smart phone, I could have told you that oil and stocks related to oil were down big last week. Folks are very concerned about the swift drop in oil drillers, services and E&P companies in the past few weeks. The email count surged last week as oil related stocks just could not catch a bid and continue to tumble. I confess that I am surprised by the speed and depth of the plunge, but after three decades as a value investor I have developed a strong stomach for these things. Far from being concerned, I am actually looking at adding to many of these battered stocks.
I have no clue what oil will do in the short run. The experts and pundits are split, with some suggesting that the Saudi decision to defend market share and not price will send prices spiraling lower. Others think that we will see a bounce before too long. I confess that my views are somewhat in line with our own Dan Dicker's, and favor a rebound in oil prices sooner rather than later. However, I have learned not to trade on my macro assumptions, as I am wrong just about as often as I am right about these things.
I do invest based on my calculation of corporate value and -- unless we are on the verge of a steep, long-lasting global depression that dramatically reduces oil demand ¿ oil-related stocks, especially drillers, are simply too cheap. I started buying many of these companies at around 85% of book value or less, and they are much cheaper that that now. I cannot conceive of a scenario where asset writedowns in the industry would be so severe over the next few years to justify the current valuations of these stocks.
Look at Noble Corporation (NE) as a great example of what is going on in the sector. After spinning off its older rigs, Noble has a fleet of 35 drilling platforms, with 22 of them built since 2007. It has four more rigs on order; three of these are already under contract. Noble is profitable, and will be next year as well. At today's price, the stock yields over 7% and, with a 47% payout ratio, the dividend appears to be sustainable. In spite of many positives for the company, the stock has been getting slaughtered recently. Noble shares are down 25% in the past month and are off about 45% year-to-date. This valuable collection of rigs and drilling platforms is currently trading at just 60% of tangible book value. The CEO and CFO have both bought shares in the past few months at much higher prices, and it is probably a good idea to follow their lead with this stock. It is too cheap by far.
Looking over the industry, this is not a lonely idea. Rowan (RDC) is a leading offshore driller. The stock has fallen 15% in the past month and is trading at 66% of book value. Shallow water driller Hercules Offshore (HERO) is down 35% in the same time and currently trades at just 40% of book value. Gulfmark Offshore (GLF) is down 15% and fetches just 77% of book value. There are tremendous bargains all over the oil-related sectors right now, and they are getting cheaper by the day. I have no idea when oil and oil-related stocks will stop falling, but I am highly confident that these stocks will be a lot higher sometime in the next five years. Any additional weakness in the near term is just a chance to buy quality assets at a bargain price.
I am always amazed how many people will quote Warren Buffett about not buying any stock you are not willing to hold through a 50% decline, but fail to practice what they preach. Oil-related stocks are down and getting cheaper almost daily. For long-term, value-oriented investors that is fantastic news.