At this time of year, we are going over our Stock Watch List and checking it thrice for stocks to fit into our Christmas stockings.
December is when most of our acquisitions are made, as tax loss selling is in full swing. The logic is relatively simple: At that time of year, many stocks are dumped, which increases the supply and generally lowers the price. Being the value guys that we are, the possibility to waltz in and pick up bargains increases.
Our bottom line is often further padded by the Santa Claus rally and the January Effect, both pushing up stock values. Of course, that does not happen every year.
While perusing our potential buys, one factor that is significant is out-of-favour sectors. We love cherry-picking in arenas where love has been lost. Although not as ugly as it was, oil and gas plays are still yearning for a cuddle.
One outfit that has been on our radar for a number of years is Parker Drilling, which has a market cap of about US$138 million.
Currently trading at a woebegone level of around a dollar, about a dozen years ago it was valued at almost $12. Since then, the stock price has had a bumpy ride of ups and mostly downs, and is currently at its nadir. If it sinks below a dollar for more than 30 days, it could receive a delisting notice from the NYSE, perhaps forcing it to one of the lesser stock exchanges if compliance is not regained.
Naturally, the beating that oil and gas prices have taken is front and centre of why the stock price has been killed. Revenue has dropped like a stone over the past two years, touching $427 million in 2016, down 44 percent. It is trending to about the same tally this year.
Meanwhile, the debt load has remained bloated, exceeding sales. Fortunately, none of it comes due in the next year, allowing additional time for the enterprise to work itself out of its current predicament.
Chairman, president and chief executive Gary Rich noted that, particularly in the United States, the rental tool business market is improving, up 47 percent from the previous quarter. That has raised margins by 73 percent, reducing Parker’s red ink, which peaked last year at almost $231 million. Recent quarters have been about half that level, still severe.
The company sells at about half of book value, which can indicate a bargain, but given that the losses will likely continue for the foreseeable future, that number will almost certainly erode.
Whenever a stock is acquired for the portfolio, an exit price is targeted. In this case, $7.24 seems reasonable if a recovery is in the cards. That indicates outsized returns if — and that is “if” — it comes to pass.
Conversely, there is a real possibility this company will enter Chapter 11, possibly leaving little or nothing for shareholders. Given our druthers, taking on this much risk is not of interest to us, although we can easily understand how this corporation will appeal to some investors.
Meanwhile, our search continues for stocks that likely have less reward potential but also reduced danger. Our process to find a few jewels is comprised of a lot of exploration via gems of lower quality.