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3 Stocks Investors Are Selling but Should Be Buying (Update 1)

Southwestern Energy ( SWN )

With natural gas prices stuck at depressed levels, Croft say that this independent, North American explorer and producer of natural gas, as well as crude oil, is one of his favorite contrarian stocks right now. He thinks there's a "good chance" the shares will outperform the broad market over the long term.

Croft thinks shares of the Houston-based company are a buy right now, partly on the expectation that U.S. natural gas prices will eventually rise on favorable energy and environmental policies, a rebounding economy and the potential full-fledged export of the commodity to Asia and Europe, where prices right now are much more expensive.

When all the stars align, Southwestern, with its conservative management team and knack for keeping operating costs low, should find itself in a very lucrative situation, he thinks.

The company has been booking operating costs of about $1.50 per million cubic feet, according to Croft, which is low when compared with the approximately $2.50 at which natural gas is now trading, and among the lowest in Southwestern's peer group. The company continues to expand acreage in the Marcellus and other shale areas and should be able to grow production at 15% a year over the next three to five years, according to Croft.

"Right now we don't need a lot more electric or power plants," says Croft. "But when we do, it will be fueled by natural gas because nuclear takes seven to ten years to set up. Natural gas plants are quick to put up and coal is dying down," he adds.

Shares of Southwestern Energy, which doesn't distribute dividends, got even more cheaper on Tuesday, closing down 5.7% at $33.31 after the company's latest earnings report came in shy of Wall Street's consensus view.

After Monday's closing bell, Southwestern reported earnings of $158.5 million, or 45 cents a share, on revenue of $744.2 million, below the average estimate of analysts polled by Thomson Reuters for a profit of 47 cents a share on revenue of $763.5 million.

Tuesday's move put the stock down 12% in the past year, although it has bounced since scraping a 52-week low of $28.37 on Jan. 20. The sell side is in wait-and-see mode right now with 19 of the 30 analysts covering Southwestern at either hold (16) or underperform (3).

"With gas accounting for 99% of 2010 production and 100% of proved reserves, the firm is subject to gas price volatility with no options to shift to oil or liquids-rich production to take advantage of a pricing advantage of oil over natural gas," Morningstar analysts caution, adding that "Southwestern has better-than-average financial flexibility thanks to careful debt management during the last five years during the build up of its Fayetteville Shale operations."

Check out TheStreet's quote page for Southwestern Energy for year-to-date share performance, analyst ratings, earnings estimates and much more.

>>To see these stocks in action, visit the 3 Stocks Investors Are Selling But Should Be Buying portfolio on Stockpickr.

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-- Written by Andrea Tse in New York.



>To contact the writer of this article, click here: Andrea Tse.

>To follow the writer on Twitter, go to http://twitter.com/atwtse .

Copyright 2011 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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