Kodiak Joins 'Stocks Under $10' Watch List
An abundance of economic news has been released over the past few days, so we wanted to give readers a brief update. We've also made a few changes to TheStreet.com Stocks Under $10 Watch List, removing one name and adding another.
First, let's look at the economic news. (One small note, however: Much of this article was sent to the Stocks Under $10 subscribers earlier this morning. You may click here to sign up for a free trial and receive all our alerts.) On Tuesday, it was reported that the S&P/Case-Shiller home-price index -- which is a measure of home prices in 20 U.S. metropolitan areas -- for March fell more than 14% from a year earlier. (The index has fallen every month since January 2007.) Monthly inventories declined to 10.6 months from 11.1 months, but remain near record levels. On a positive note, new-home sales increased 3.3% in April. However, this was mostly due to last month's data being revised lower.
We also saw a drop in consumer confidence in May to levels not seen since 1992, mostly because of high energy prices and a tighter labor market. This was followed by a much better-than-expected durable goods report, which was surprising, given the latest data provided by Ford (F) and Boeing (BA) that suggested sales were sluggish last month.
After reading several reports from analysts and economists, most believe that the recent economic data -- especially on housing -- were surprising. This is a great example of how out of touch Wall Street is with Main Street, as most consumers who are trying to buy or sell a house could easily have predicted the huge decline in home prices.Overall, the economic data remain weak, but some gauges appear to be bottoming out, such as consumer confidence and manufacturing. Unemployment and housing, however, will probably take a little longer to find a bottom, which may continue to pressure the equity markets in the short term. On the energy front, we are starting to see a minor pullback in oil, although prices are still extremely high. If oil prices remain at current levels, we are likely to see a number of earnings warnings due to businesses having a much tougher time passing these costs on to the consumer. But apparently Dow Chemical (DOW) believes otherwise, after recently announcing a 20% increase in prices to account for higher feedstock prices. Turning to the Stocks Under $10 Watch List, we are adding Kodiak Oil and Gas (KOG) and removing Visteon (VC). First up is Kodiak, an oil and gas producer that operates in the western U.S. The main catalyst for the company lies in the Bakken Shale play, located in the Williston Basin of North Dakota and Montana. The company recently increased the amount of land it owns in this area to approximately 38,000 acres. Kodiak has yet to drill a well on the property, but activity in the area has been successful for several operators -- leading to high expectations for Kodiak. This has resulted in a nice jump in the stock price over the past two months, from its 52-week low of $1.54. Numerous risks are apparent with Kodiak, however. For example, the company has little in the way of proven reserves and only $8 million in revenue over the past 12 months. However, the reward could be worth the risk given the potential of the Bakken project, as well as another project in Wyoming, where Kodiak has a joint venture with Devon Energy (DVN). Next is Visteon, which makes automotive parts. The company has done a great job restructuring operations in a difficult environment, as cost savings are expected to reach $215 million over the next two years. Also, management has diversified its operations outside of the U.S., which is a clear positive. However, Ford is still a significant customer -- accounting for 36% of Visteon's revenue as of the first quarter of 2008 -- and two weeks ago announced that it would cut vehicle production by 15% due to some macro headwinds. This move by Ford will likely spur additional cost saving measures as Visteon looks to decrease its large debt position, which stands at nearly $3 billion. We do not believe the stock has a favorable risk/reward in the short term given the uncertainty in the U.S. macro outlook, which has prompted us to remove Visteon from our Watch List. Frank Curzio manages TheStreet.com Stocks Under $10 service. He writes frequently about stocks priced below $10 a share, such as Sirius (SIRI), Lundin Mining (LMC) and Level 3 Communications (LVLT) for TheStreet.com
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