NEW YORK (MainStreet)—When you pick a stock, you make a bold statement. You are basically saying, "I am right and everyone else is wrong -- but eventually they will see it my way." You have to have a level of conviction that borders on arrogance. In order to have the confidence to make such a bold statement, you must have a piece of evidence that is not widely known or understood by others -- you must have an edge.
In April of this year, I was doing research on Apache, an oil and gas company headquartered in Houston, Texas. I sat in my college dorm room with nothing more than a laptop and an Internet connection.
Apache sat at its 52 week low while many of its rivals sat at their 52 week highs. Instead of reading analyst reports and seeing what others said on the stock, I went right to the company's annual 10K filing on its website. I find it incredibly valuable to read these annual reports first so I can formulate my own thesis before reading the opinions of others.
After reading this report and listening to Apache's most recent conference call, I came away with four key points about the company:
- Large exposure to Egypt
- Subpar foreign production growth
- Excellent production growth in the United States
- Management had a plan to fix Apache's problems
It was now easy to understand why Apache sat at its 52 week low, although I believed this was an overreaction. Egypt was undergoing political turmoil and investors feared something would happen either to Apache's production in Egypt or to its ownership of the assets altogether. Markets have a tendency to overreact both ways, and it appeared that fears about Egyptian exposure was an overreaction. Adding to investors fears were poor international production numbers.
Despite these problems, Apache had tremendous production growth in the United States and this was just beginning. Management had a plan to shift focus from international assets to assets in the United States. After reading what analysts had to say about the company, I realized the market seemed to discount this plan and focused only on Egypt. I believed this was a mistake, and this is where I found my "edge." I saw something that the market did not widely see or understand. I bought Apache as I believed a shift in focus toward the United States would ease investors fears' about Egypt and increase the price of the stock.
Soon after I purchased the stock, Apache came out with its earnings. The earnings were nothing spectacular, but management announced a plan to sell $4 billion in assets and use half of the proceeds to buy back stock and the other half to pay down debt. Moreover, Apache reemphasized its focus on U.S. production. Apache soared on this news.
Fast forward to today, and Apache is sitting at its 52 week high. Management exceeded its target of $4 billion is asset sales, selling some Gulf properties and some Egyptian properties. Production in the United States continues to grow rapidly, and Apache's stock continues to climb.
I made nearly 30% in six months, because I had the conviction to purchase a stock despite downgrades from analysts. You can beat the analysts at their own game. Pick a stock that is not widely covered and read everything you can about the company. Find your edge and develop a thesis. Doing this will allow you to distinguish between undervalued stocks and junk stocks. You don't need a business degree from an Ivy League school -- all you really need is a laptop and an Internet connection.
--Written by Alex Pottmeyer for MainStreet