The stock market appears strong, but weak corporate earnings lurk like Kryptonite.
Markets closed lower Thursday, snapping a record-setting streak. The culprit: disappointing second-quarter scorecards from several companies, notably Intel and Southwest Airlines.
Investors have concluded that the stock market is still the best game in town, because other investments look even less appealing.
The problem is, this bull market is running on fumes. Irrational optimism is especially prevalent in the oil and gas sector, as investors eager for a turnaround in energy stocks grasp for any good news.
One to avoid is oilfield services company Superior EnergyServices (SPN) , which is scheduled to report second-quarter earnings on Monday.
Stocks have rallied since hitting a bottom about a month ago, propelled by better-than-expected earnings reports and positive economic data. However, analysts had set the bar rather low.
When the final numbers come in, the results will be dismal. At the same time, the economic recovery is anemic by historical standards.
Growth opportunities still exist, but investors must be judicious and focus more than ever on a company's fundamentals.
Research firm FactSet expects second-quarter earnings for the S&P 500 to show a blended year-over-year decline of 5.5%.
And yet, the market is overvalued.
The forward 12-month price-earnings ratio for the S&P 500 is 17.1, which is above the five-year average (14.6) and the 10-year average (14.3), according to FactSet.
In this precarious environment, a disappointing earnings report can send a stock off a cliff.
Southwest Airlines stock plunged Wednesday after the company reported revenue and earnings growth that missed analysts' projections, though computer disruptions that led to flight cancellations didn't help matters. The stock posted the sharpest decline in the S&P 500.
Meanwhile, Intel's stock dropped 4.5% on Wednesday.
One of the most treacherous and volatile sectors is energy. The U.S. benchmark West Texas Intermediate crude is hovering at about $44 a barrel.
Brent North Sea crude, on which international oils are priced, hovers at about $46 a barrel. These levels represent a sharp improvement from oil's lows in the $20 range this year.
Meanwhile, oilfield services giant Baker Hughes has been reporting consecutive rises in the U.S. rig count, another positive sign that has been feeding Wall Street's hopes.
But the scenario remains shaky for debt-laden and overextended upstream energy players that include drilling and oilfield services players. Oil prices remains well below the key threshold of $50, the break-even price for many energy companies.
To stave off bankruptcy, scores of drilling companies have been forced to lay off workers, delay or cancel new projects, and renegotiate contracts.
Which brings us to Houston-based Superior Energy Services. With a market capitalization of $2.65 billion, Superior Energy Services provides oilfield services and equipment to crude oil and natural-gas exploration and production companies in the Gulf of Mexico, internationally and in the U.S..
The company posted a first-quarter loss of 31 cents a share. When the company releases operating results on Monday, the loss is expected at 58 cents a share.
For the third quarter, the loss is estimated at 55 cents, compared with a loss of 46 cents a year earlier. For the full year, the loss is forecast at $2.15, compared with a loss of $1.19 in 2015.
Superior Energy Services shares have risen about 29% for the year to date, as exuberant investors bet that the energy patch has permanently turned the corner. This recent reversal of fortune for Superior Energy Services compares with its two-year decline of 50.83%.
Some analysts are bullish on the stock, but investors should be cautious.
Pressure on prices, falling utilization of drilling assets, lower activity in well fracturing and depressed international demand will continue to weigh on Superior Energy Services. Indeed, the company's management estimates that the company's 2016 capital expenditures will steeply decline.
Most worrisome of all is the company's rising debt. The total debt-to-equity ratio stands at 73.20, compared with 63.20 for the industry.
The company's return on equity is -61.38%, compared with an average of 5.4% for its peers. Drilling demand remains sluggish, making it difficult to generate sufficient revenue to service this debt.
And Superior Energy Services said this month that it has canceled its dividend.
The upshot: Don't take needless risks on debt-ridden drilling companies. The energy sector still faces daunting challenges, and it wouldn't take much for oil prices to reverse course.
There are far safer and more productive investments.
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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.