This services company has an unusual niche in the energy and mining industries.
December 31, 2018
Weak oil prices, some relatively minor operating issues and highly risk-averse year-end investor sentiment has pushed its shares to near-record lows. Yet the company’s business is more durable than it might appear, the management continues to improve its operations, and it is generating positive operating free cash flow. While its shares carry significant risk, we believe the considerable return potential more than offsets the risks.
A group that is doubly out-of-favor is the energy exploration and production (E&P) companies that have emerged from Chapter 11 bankruptcy. E&P stocks in general have fallen sharply over concerns that oil and gas prices may once again tumble. Yet in their rush to abandon these stocks, investors are creating some bargains.
Last month we highlighted several turnarounds in Europe and Asia. This month we look north to our friendly neighbors in Canada. While its public equity market as measured by the respected Toronto Stock Exchange (total market capitalization of about $2.2 trillion and 1,500 listed companies) is considerably smaller than that of the United States, fascinating turnaround opportunities can be found there.
At best, the broad stock market’s 15.8% drop since its peak only three months ago on September 20 has been disconcerting. The deeper 23% plunge in small cap stocks, as measured by the Russell 2000 index: startling. For the weakest 9% of S&P500 stocks – often those with some type of unfavorable macro exposure – their average loss of 40% in such a brief time has been simply jaw-dropping.
EV/EBITDA: What Is It & Why Are We Using It More?
In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple. We thought it might be useful to describe this measure and why we like it.
This Forbeswrite-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.
George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."