This Rally Still Has Plenty of Room to Run

As long as the cash flows in something like the volumes of the previous months and the U.S. gets something like its recent share, I don't think the stock market is in danger of anything worse than a 10% correction in the first half of 2007.

That doesn't mean, however, that there aren't big risks in the financial markets now. It's just that you'll find them on the debt side rather than the equity side.

New Developments on Past Columns

"Profit When Oil's Have-Nots Crash": In its fourth-quarter earnings report, Devon Energy(DVN Quote) amply demonstrated why it is one of the oil patch's "haves." The company increased production in the fourth quarter by 7% from the fourth quarter of 2005 and added 489 million barrels of oil equivalent to its reserves.

The company finished the year with a record 2.4 billion barrels of oil equivalent reserves, 13% above 2005 reserves. Unlike a lot of oil companies recently, most of Devon's added reserves -- 78% -- came from finding new oil and gas. Only 22% came from acquisitions.

The future looks bright, too. The company's key 2006 acquisition added 169,000 acres -- and 600 billion cubic feet of proved gas reserves -- in the hot Barnett Shale natural gas play in Texas.

None of this is to say that the plunge in oil and natural gas prices from 2005 and 2006 highs hasn't hurt the company in the short term. Earnings for the quarter came in 2 cents a share above Wall Street estimates but a full 42% below the fourth quarter of 2005, a time of especially high prices for natural gas. Wall Street is now projecting a decline in earnings for 2007 because of tough comparisons with high 2006 earnings and a resumption of earnings growth in 2008.

The stock now sells at 11.5 times projected 2007 earnings and 10.4 times projected 2008 earnings. That's cheap for an oil and gas company with Devon's reserve position and exploration potential. The stock is likely to start to move up in mid-2007 as investors start to factor 2008 growth into their price targets. As of Feb. 20, I'm leaving my price target at $80 a share but stretching the schedule out to December 2007 from September 2007. (Full disclosure: I own shares of Devon Energy in my personal portfolio.)

At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Devon Energy and Tenaris. He does not own short positions in any stock mentioned in this column.