Avoid the Falling Knives in Energy, and Catch This Momentum Stock

Looking for a reliable growth stock in the volatile energy patch? This company is poised to surprise on the upside when it releases earnings Friday. Grab it now.
By John Persinos ,

Many investors are scooping up beaten-down oil and gas stocks with low valuations, on the hope that they will start rising along with energy prices.

But as the Wall Street saying goes, it is like trying to catch a falling knife, and investors will probably get cut.

The safer way to play energy is to look for a company that is poised for a positive earnings surprise, with a strong and diversified asset portfolio, a reasonable valuation, share price momentum and sustainable debt levels. They are hard to find, but Houston-based Cabot Oil & Gas (COG) - Get Report  is an energy stock that meets all these criteria. 

Lots of folks on CNBC keep telling us that energy has finally hit bottom, but oil prices have stubbornly remained below the $50-a-barrel threshold necessary for energy companies to break even.

U.S. benchmark crude fell $1 Wednesday or about 2.4%, to close at $41.92 a barrel. Brent crude, used to price international oils, fell $1.37, to $43.44 a barrel.

Many of those energy knives keep falling, with stocks such as HessMarathon Oil and Transocean all plunging at least 4% Friday. But Cabot actually eked out a 0.25% gain.

With a market capitalization of $11.12 billion Cabot is an independent oil and gas company that explores for, develops and markets natural gas, oil and natural gas liquids in the U.S. The company's major assets are concentrated in the Marcellus Shale in northeast Pennsylvania and the Eagle Ford Shale in south Texas.

Favorable earnings estimate revisions for a stock are signs of momentum that should hearten investors. Such is the case with Cabot.

Cabot is scheduled to report second-quarter earnings on Friday after the market closes.

The most recent analyst consensus estimate is for a loss of 7 cents a share, compared with earnings of 11 cents a year earlier.

Regardless, the company's energy assets are diversified, with high-volume, low-risk plays in the Anadarko Basin, Appalachia, the Gulf Coast and the Rocky Mountains. Most of the company's assets are in natural gas, demand for which is projected to rise from now through next year.

Meanwhile, the company's cost-control efforts have resulted in a balance sheet that is in better shape than many of its struggling peers.

Rising natural-gas prices are a tailwind for Cabot, a trend that should quickly accelerate as the U.S. copes with a hot summer that is driving electricity demand. Natural gas trades at about $2.66 per million British thermal units.

Natural-gas prices are likely to trade at about $3.10 per MMBtu this year and $3.80 per MMBtu in 2017, according to estimates from Goldman Sachs.

Cabot's total debt is $1.64 billion, for a debt-equity ratio of 54.46, about in line with the ratio of 54.20 for its industry.

The stock has risen more than 33% year to date, an impressive trajectory compared with 10.56% for the Energy Select Sector SPDR Exchange-Traded Fund and 6.20% for the S&P 500.

Despite the run-up in Cabot's share price, there appears to be plenty of upside left.

Cabot's shares are trading at about $24. The analyst consensus one-year price target is $27.80, which would represent a gain of nearly 18%.

The company's forward price-earnings ratio is 56.24, high compared with direct competitors Apache (33.61), Carrizo Oil & Gas (31.46), Chesapeake Energy (9.79) and the industry (39.30). However, Cobra's valuation is reasonable in light of its growth prospects.

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John Persinos is an editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

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