Twitter and Lunch with the Analyst!
A Bottom in Energy and Gold?
This Oil & Gas Producer Looks Like a Leader
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Twitter and Lunch with the Analyst!
First, a couple of housekeeping items:
If you’re on Twitter, be sure to follow me—my handle is @MikeCintolo. I regularly Tweet good stuff on what I’m seeing in the market, sectors and individual stocks (especially during earnings season). Plus I’ll link to an occasional special article I write and any videos I record. It costs nothing, and you get some good information. Good deal, right?
Second, don’t forget to sign up for our second Lunch with the Analyst, my free webinar on November 18 at 1 pm eastern time. I’ll review a bunch of charts, go over what I’m looking at, and (best of all) answer any and all questions you have—on the market, individual stocks or my method of growth investing. (If you can’t attend live but you sign up ahead of time, we’ll email you the recording afterwards.) Click here to register. I hope to see you there!
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A Bottom in Energy and Gold?
Ninety percent of what I do is couched in the growth methodology that I’ve written about hundreds of times—companies with rapid sales and earnings growth and, ideally, a new revolutionary product or service that’s changing the way we live, work or party. Yet while the vast majority of my research involves growth stocks, I do keep an eye out for potential turnaround situations.
Why? Because historically, about one out of every five or six big winners will be a turnaround situation—especially in so-so economic times. (In the late 1990s, by contrast, almost all the big winners were growth stocks.) So, even though I never, ever (ever!) buy stocks and sectors that are in longer-term downtrends, I do keep an eye on them for signs that they’re turning higher.
That leads me to energy and gold stocks, both of which remain in longer-term downtrends, but have been showing signs in recent months that the worst could be behind them.
When sniffing out turnaround situations, I like to look for three things: a big, prolonged decline, a foundation and a decisive upmove.
First, of course, is a big, prolonged decline. I’m not trying to buy the bottom after a crash; rather, I’m looking for stocks and sectors that have been really battered for a year or more (which is sure to have knocked out each and every weak hand).
Both gold and energy fill that bill. Energy stocks topped in June 2014, and based on the S&P Oil & Exploration Fund (XOP), fell nearly 62% by mid-September. And gold stocks have been far worse: The Gold Miners Fund (GDX) has dropped an incredible 81% since its peak in September 2011!
Once I see a massive, year-or-longer decline like that, I want to see months of bottoming action. This is very important! Too many investors try to jump in before the long-term declines end, others try to buy on the way down, and some try to buy during the bottoming process. But none of these actions lead to profits because big declines take time to bottom out.
So far, I see some bottoming action with good potential for both energy and gold, but more work probably needs to be done. Looking at the weekly chart of XOP below, it looks like the group started a bottoming process in mid-August; for GDX, the process started a bit earlier, in mid-July. To me, the process is still ongoing; it will probably take a bit more time (another few weeks?) for a foundation to be built.
When will the green light come? I am watching for a decisive upmove to multi-month highs, combined with a push above each fund’s respective 40-week moving average ... and then a brief, normal pause or pullback for a few days or a couple of weeks.
For XOP, that correlates with a move above 45 followed by a rest period. For GDX, the level I’m looking for is 18 or 19 also followed by a brief rest. Such action would dramatically raise the odds that a new uptrend has begun.
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This Oil & Gas Producer Looks Like a Leader
While I’m not a huge investor in exchange traded funds (ETFs), when you’re talking about big potential turnarounds, I think taking a stab at XOP or GDX (or any other well-traded sector ETFs for energy and gold) can work just fine. These funds have had huge declines, so when the trends turn up, they can move pretty well on the upside.
That said, I’m more interested in individual stocks—if you find the leader of the sector, it can really put on a show when the tide turns. And, interestingly enough, a couple of stocks in each group have appeared in Cabot Top Ten Trader, my advisory that focuses on the stocks that are under the strongest accumulation in the market. That’s encouraging because there’s some nascent leadership already forming in these groups, despite the ongoing bottoming process.
One I’m intrigued with is Newfield Exploration (NFX), a stock that’s already hitting multi-month highs. Here’s what I wrote about the company in Cabot Top Ten Trader on October 19:
“Continuing low prices for crude oil have pressured many stocks in the oil patch, and Newfield Exploration has felt the same pressure. But this Texas-based oil and gas explorer, driller and producer with major holdings in the Anadarko Basin, Uinta Basin and Williston Basin has weathered the storm better than many competitors because of the quality of production from its wells. Newfield’s revenue grew by 23% in 2014, even as crude prices plummeted during the second half of the year. And while revenue has declined for three straight quarters (and analysts are looking for around a 23% dip in revenue for the year), earnings are still solidly in the black. When Newfield reports Q3 results on November 3 after the market closes, analysts expect to see 17 cents per share in earnings and revenue of just over $468 million. If oil prices were to take another skid lower, all bets would be off, but even with crude under $50 a barrel, Newfield will continue to make money. And when oil prices rise, Newfield will likely rank among the leaders.”
NFX just released earnings Tuesday (November 3), and they were good enough: revenues and earnings were down from the prior year, but the bottom line was still solidly in the black (21 cents per share, a penny above expectations), thanks in part to the company’s top-notch hedging program.
More importantly, the stock remains in great shape—it actually already tagged multi-month highs in mid-October and despite this week’s dip is still just a few points shy of new high ground. On a day-to-day basis, NFX will probably get yanked around by the movement in oil and gas prices, but should the sector get going, I think the stock will be one of the best performers.
You can consider a small position here … or sign up for Cabot Top Ten Trader to get not only my updated advice for Newfield, but to be on top of all the new leaders of this market advance, know where to buy them, and have a stop in place to know where to book your profits.
For more information, click here.
Sincerely,
Mike Cintolo
Chief Analyst, Cabot Growth Investor
And Cabot Top Ten Trader
