Apples and Oranges, Stocks and Companies
Peak Perception = Market Top
Oasis Petroleum (
OAS
)
Oasis Petroleum (
OAS
)
---
Every day, we're told the market moved up because of this
economic report, or down because of pessimism surrounding
upcoming earnings, or sideways because investors were waiting on
some upcoming news. We've seen that this week following the
election results, with many believing the stock market will
XYZABC because of XYZABC.
In other words, the media gives you the impression that the
market (and, hence, individual stocks) are directly responding to
specific news, such as earnings, economic data, politics or
international affairs.
But that's totally wrong!
I don't mean to suggest that the market is a totally isolated
animal; over the long run, the market tends to follow along the
general path of the economy and earnings. But for periods of
months-even years, both the market and individual stock trends
can be affected by factors that are more powerful than earnings
or the economy. For example, just look at this monthly chart of
Abbott Laboratories (
ABT
), a conservative blue chip growth stock:
The bars represent the stock itself, while the generally
smoothly rising line is the earnings line (depicting the
company's 12-month earnings per share totals). As you can see,
back in the late 1990s, ABT was trading around 50 per share, even
as earnings totaled about $1.60. Now fast forward to mid-2011,
and you see ABT was still hovering at 50 per share ... even
though earnings by then were up to $4.50 per share! Of course,
we've seen the same thing across the market for more than a
decade-no net progress for stocks, even as earnings and dividends
have kited higher, and interest rates have plunged (generally
making stocks more attractive).
How can this be? Simple-the stock is not the company. It's a
topic I've written about many times, but it's so easy to forget,
especially nowadays when the market is so news-driven. For
management and employees at many firms, things are better now
than they were 10 or 12 years ago. But for shareholders, not much
has changed.
So what does drive share prices? Investor perception-how
investors (particularly big investors, like mutual funds and
pension funds) view the company's future prospects. Simply put,
when big investors sour on a firm's potential ... when they feel
the best of the firm's growth is in the past ... they usually
sell. And when they sell, the stock goes down! (Note, too, that
funds don't have to dump all of their position to top a stock;
they might cut back from 7 million shares to 3 million shares,
but that still represents a ton of selling.)
My point is that too many investors confuse the stock and the
company. After a stock takes a hit, I often get questions like
"Is the company still doing OK?" or "Why is the stock down so
much if earnings met expectations? The answer lies in perception.
While fundamentals like sales and earnings growth are important,
they're not everything. But to really know when a stock is
putting in a meaningful top, you have to measure investor
perception; the fundamentals will always turn down months after a
stock does.
---
The above discussion is relevant today because of what I'm
seeing among many high-profile companies that have been huge
winners during the past few years, names like Priceline.com,
Chipotle Mexican Grill, Baidu and even Apple. Are these firms
still doing well? Absolutely! All of them have reported third
quarter results, and as a group saw their revenues grow 29% from
the year before, while earnings were up 32%.
But each of their stocks has run into trouble; I think at
least a couple have probably hit long-lasting tops, and even the
others look ragged.
Baidu, which was probably our biggest winning stock of this
post-2009 cycle, hit a price peak back in July 2011; since then,
the stock is more than 30% off that high and its relative
performance looks awful. There are fears of greater
competition.
Chipotle Mexican Grill topped in April of this year and
managed to collapse 40% in just a few months before its recent
bounce.
It's the same story with Priceline, which fell 30% after
topping in April. Shares have popped back somewhat on earnings
but have a mountain of resistance to overcome in the 650-700
area.
And, finally, Apple just hit a peak in September but has
slipped about 20% from its high (as of last week), falling below
its long-term 200-day moving average for the first time since
June 2011.
Now, it's always possible one or two of these names will come
back in a new market uptrend (though I wouldn't touch any of them
here unless you're a very nimble trader). But my point is that,
even though these companies are still doing well, investor
perception appears to have peaked ... and if that's the case,
it's going to be hard to make all that much money in the
stocks.
The bottom line is that when you click that buy button on your
online brokerage page to buy, you're not buying the entire
company, its operations and its products. No, you're buying a
stock-something that is driven mostly by supply and demand, which
in turn is driven by emotions, dreams and desires.
Just something to keep in mind as we all try to interpret this
volatile market action.
---
Now back to some real analysis. The market remains in a
correction-by our measures, the intermediate-term trend turned
down a couple of weeks ago, and the rallies of late have been
unimpressive, with most lacking any volume or real upside
thrust.
There are plenty of parts of the market that don't look great
... growth stocks in particular. Many have been hit on earnings,
and it seems like anything with a very high valuation is being
taken down. Of course, some names are still holding up, but
usually they are less well-known names that haven't been
outstanding performers for the past few years-the stocks like
Apple and Chipotle that went up 500% are under pressure, while
those that have consolidated for a year or two are still
consolidating.
However, I do see some encouraging signs. One is that this
correction, which is now nearly seven weeks old, has been
relatively mild pricewise. Sure, maybe that's changing
post-election, but at this point, it's a small change of
character from the past couple of years, when the major indexes
have whipped up and down repeatedly.
Second is the fact that financial and emerging market stocks,
two sectors that have led pretty much every downturn since 2010,
are actually holding up well since the market's mid-September
top; both have etched flat bases and have hit slightly higher
lows as the major indexes have done the opposite.
And third is that, despite falling prices for actual
commodities (the price of oil is down 14% since mid-September,
copper is down 10% during that same time, and natural gas has
dropped 10% during the past two weeks), commodity stocks have
been reacting well to their quarterly reports, with some actually
punching to new highs.
Thus, while I'm still looking for big growth ideas, I'm not
being closed-minded about where I find them. In today's Wealth
Advisory, I want to give you an idea from the energy patch, with
what I believe is one of the most attractive fundamental stories
in the rapidly-growing Bakken, specifically an area known as the
Williston Basin, where much of the action is occurring.
Oasis Petroleum (
OAS
)
has rights to drill in more than 300,000 acres in the Williston
Basin, and it's doing just that with an extremely aggressive
drilling program (operating nine to 10 rigs) that is driving
production through the roof! Production for the just-reported
third quarter totaled 24.2 million barrels of oil equivalent, up
109% from a year ago and up 19% from the prior quarter! And
management sees more of that, with fourth-quarter production in
the 26 to 28 million-barrel-range, up about 78% from a year
ago.
But there's more to the story than that. We're very impressed
that Oasis is rapidly building up its infrastructure and
capabilities, both to maximize how much oil it can sell, and also
to cut costs. For instance, the firm has established an Oasis
Well Services division, which has its own fracking and hydraulic
pumping crews, and does its own salt water disposal; these
efforts have helped drive down well costs by 10% this year, with
another 5% to 10% reduction coming in 2013.
Finally, Oasis has found a bunch more natural gas in its
wells, and while gas is still a small part of its pie (8% to 10%
of production), it's growing, so its gas infrastructure has
ramped up as well. All told, revenues and cash flows have grown
at triple-digit rates for many quarters; that could slow as the
firm grows larger but I expect years of big production
growth.
So that's the company-but what about the stock? Well, I think
perception (there's that word again) of the firm's potential
might be getting close to an inflection point. OAS came public in
June 2010 and rallied nicely into March 2011 ... but it's been
building a huge base ever since! Recently, though, the stock has
tightened up in the 28 to 32 area; it's tempting to nibble here,
but the real fireworks should begin if/when the stock breaks out
above 36.
All the best,
Mike Cintolo
Editor of
Cabot Market Letter