2 Stocks and 1 Sector We're Watching in the Second Quarter

oil industry pumps

With the stock market still hitting record highs, finding stocks worth buying from a valuation standpoint becomes more difficult. But even among high-flying stocks, there are some that still stand out.

We asked three top Motley Fool contributors to share with us what they're watching in the second quarter under these conditions. Read on to find out why First Solar (NASDAQ: FSLR) and Rollins (NYSE: ROL) are under the microscope, as well as why a whole segment of an industry is being eyeballed closely.

Taking the pulse of shale drilling's pressure point

Tyler Crowe (Frack sand industry): I'm not looking at one individual stock in particular when second-quarter earnings reports get released. Instead, the industry that has me intrigued the most is the frack sand industry and the implications it may have on the rest of the U.S. shale drilling industry.

So far, shale drilling has benefited immensely from lower-cost oil service contracts. So many oil services companies right now have idle equipment fighting for any kind of work, the rates producers pay are abnormally cheap. One could argue that without these cheap oil service contracts, many producers couldn't make a profit at today's oil prices .

The one component of the oil service industry that isn't suffering from idle capacity is frack sand. Changing well technologies have resulted in a drastic increase in per-well sand consumption, and most frack sand producers today are either somewhere near capacity or ramping up their last idle facilities.

The question I want answered is this: How quickly can frack sand producers build new production facilities or execute expansion plans at their existing plants? If frack sand can't keep up with the growing demand, there is a good chance sand prices will rise, and it will decelerate the pace of oil and gas production growth.

Either way, frack sand producers look like they will have a pretty good run for a while; whether it be OK prices on much higher volumes, or better prices on slightly more volume. More importantly, though, is what that could mean for other investments in the industry.

The solar tariff mystery

Travis Hoium(First Solar): The solar industry, in general, will be interesting to watch in the second quarter, but First Solar has a particularly interesting position. The company is upgrading its manufacturing equipment from what's called Series 4 to Series 6, a product that will mean a larger form factor and more efficient panels. Combined with pre-engineered racking and inverters, it's intended to provide a cost-effective solution for development customers.

But First Solar also finds itself in the center of a strange trade dispute that could have a wide effect on solar manufacturing. When U.S. manufacturer Suniva went bankrupt, it invoked a rare trade rule that could allow the president of the United States to set highly punitive tariffs on solar imports. For First Solar, that could mean its own imports from Asian manufacturing become more costly, but it has a plant in Ohio that could suddenly see a windfall in high-margin demand.

First Solar needs to continue making progress on Series 6 manufacturing, which will be worth watching for the second quarter. But more important could be the potentially punitive tariffs on solar imports, which would likely end up helping First Solar over the next few years. And as Suniva's petition moves forward, it will be something all First Solar investors will want to watch.

No need to bug out

Rich Duprey(Rollins): Like a certain roach motel, an investor checking into exterminator Rollins just might not check out. It's simply too profitable of a business that shows no signs of slowing.

Owning such well-known pest-control brands like Orkin and Western Pest Control, Rollins is going where many fear to tread, namely where roaches, ants, mice, and termites make their homes. Those sort of pests give many people the willies, and leaving their eradication to pros like Rollins is an expense they're willing to pay. It reported that revenue increased 6% in the first quarter to $375 million as adjusted profits surged 13% to $36 million.

The key to those gains has been the recurring nature of its operations, as 80% of it is repeat business. It says only 2% of its revenue gains in 2016 came from price hikes. That suggests customers are highly satisfied with their services, which are apparently as sticky as a rat trap.

The market also likes what it sees, bidding up Rollins' stock 28% so far this year and sending it more than 50% higher over the past year. That kind of performance, both operationally and in the stock market, means the bug killer trades at a premium, or some 53 times earnings and 45 times next year's estimates. With analysts pegging its long-term earnings growth at 9% annually, Rollins comes at an elevated value in terms of its price-to-earnings ratio.

Certainly, the pest control services company has been on a roll, and with demand as it's been, Rollins has a bright future ahead of it crawling into dark crevices. Still, I'd continue to watch its stock for any sign of it flying into a bug zapper, which would make it a much more attractive investment.

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Rich Duprey has no position in any stocks mentioned. Travis Hoium has no position in any stocks mentioned. Tyler Crowe has no position in any stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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