The market staged its largest and most impressive rally of the year Wednesday with all the major indices up more than 2%. A good portion of this return of "animal spirits" to the market was due to the belief that Ben Bernanke's Federal Reserve stood ready to step in once again to support the market. If this turns out to be the case, I would expect similar effects to that of previous efforts, where a lot of this excess liquidity flowed into the commodity complex. This should provide a good tailwind to energy prices and could lead to some good "risk on" trades in the beaten-down energy sector. Here are two undervalued Texas energy plays that could ride this catalyst to much higher stock prices.
Forest Oil (FST) is an independent oil and gas company whose primary assets are located in Texas and Louisiana.
Four reasons FST is solid speculative play at $8.50 a share:
- The analysts that cover the stock have a median price target of $14 per share on Forest Oil. Credit Suisse has an Outperform rating and a $2.32 per share earnings target for 2014.
- This levered energy play was trading near $30 last summer. It has been hammered by low natural gas prices, as well as falling oil prices. The recent uptick in natural gas prices and the upgrade to Buy from Canaccord Genuity the stock received earlier this week could be the catalysts that mark the bottom of its descent.
- FST is selling near the bottom of its five-year valuation range, based on P/E, P/CF, P/S and P/B.
- The stock is trading for 81% of book value and a forward PE of just over 9.5, a discount to its five-year average of 13.5.
- Several insiders used the recent selloff to pick up new positions in May.
- The stock is cheap at 80% of book value and just over 9x forward earnings, a large discount to its five-year average of 17.6. The company is predicting production growth of 14% to 20% in 2012 and the production "liquids" ratio to hit 55% by the end of the year.
- The company grew operating cash flow by 50% between 2009 and 2011, and the stock is selling near the bottom of its five-year valuation ranged based on P/S and P/B as well.
- Analysts' median price target is $37, roughly double its current price.
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