My picks over the last few months could be categorized as the good, the bad and the postponed. Let's start with the bad, since that is much easier to see right now.My insider-based market indicators are looking pretty ominous. I went to 40% cash last week, and will likely be up to 75% by the end of this week. Raising cash has been easy lately. With so many stocks trading sharply down for little reason, mental or actual stops are being hit on nearly a daily basis. And when a stock comes down for good reason, it's even more of a no-brainer to get out. Such was the case with Vitesse Semiconductor ( VTSS), which I last recommended buying on
At some point, Vitesse will likely be a bargain again. It just seems unlikely that the promise of the firm's new product lines was a sham. After all, orders were taken and product was shipped. Seeing how strongly its shares bounced back after falling sharply again this week, it may have already hit bottom, but I'm still staying away. It's all going to come down to whether the new products are selling, and investors won't know that until the company releases its (now tardy) quarterly results, and all of the restatements come out.
two E&P firms I've discussed, Goodrich Petroleum ( GDP) and PetroQuest Energy ( PQ), confirm that fundamentals remain good for the sector. I still like both these stocks. My favorite play in the group is still the underfollowed and undervalued Seitel ( SELA). Seitel owns one of the largest libraries of 2D and 3D onshore and offshore seismic data in North America, which it sells to explorers and drillers. Its operating income more than doubled in the first quarter, and after being in the red for over two years, it posted its second straight profit: 4 cents a share. Revenue was $44.7 million, up from $41.4 million in the fourth quarter. That may not seem like much of a jump, but it's notable, because the fourth quarter is usually stronger than the first.
This bodes well for future revenue, as does an expected doubling of revenue this year from clients prepaying for new seismic surveys. These "acquisition" revenues tend to be a leading indicator of future cash sales of data. The clients who pay for the surveys have exclusivity for viewing new data for six to nine months. After that, Seitel can charge all comers for a glimpse. The company reports that demand for its data is strong in all geographical areas and for all types of seismic data. CEO Robert Monson summed up the investment thesis nicely on the first-quarter earnings conference call: "The trends we see indicate that the E&P companies are starting to spend more money on exploration. ... We believe the increasing difficulty in replacing hydrocarbon production will continue to place a premium on finding new reserves, and make our data even more valuable through this expanding cycle." Not surprisingly, forward EPS estimates have nearly doubled over the past couple of months to 18 cents to 24 cents for 2006. EPS is expected to rise another 50% in 2007. Jeffries & Co. analyst Geoffrey Gengaro has a $6 price target based partly on expectations that Seitel will generate $41.6 million in free cash flow this year and $78.3 million in 2007. That sounds about right to me, and I believe there is a chance that the picture for next year may get even better. I'm staying long a trend I believe is inexorable -- the supply/demand equation is likely to be on the side of E&P firms for at least the next year, if not longer.
Russian legislators are understandably trying to impose some order on the wild growth of gambling in the country, and one piece of legislation that passed both houses of the Duma last year was a measure to license gaming machine distributors. Unfortunately, the government's failure to follow up by specifying who is to conduct oversight has meant that machine sales in Russia have been effectively halted. My understanding is that the Duma's lower house tried to delay implementation of the legislation until the details could be worked out, but the upper house didn't sign off on this because of squabbling over other issues. With that dispute now resolved, the delay should be passed. In any case, I believe the discount applied to WMS because of the Russia situation is shortsighted. The fact that the third quarter was so good despite putting up goose eggs in Russia (not to mention the continued harm to sales in Gulf Coast states after last year's hurricanes) shows that WMS is on the right track. Revenue rose 2.8%, operating income climbed an impressive 26% to $12.5 million, and EPS rose nearly 24% to 26 cents. The average selling price for WMS' products increased again last quarter, and it has a product pipeline that should result in a major new release in each of the next few quarters. There was obvious disappointment that WMS took down guidance, and its shares gave up all the ground they'd gained in April. However, it would be tough for the firm to disappoint again this quarter: Its guidance for revenue of $122 million to $127 million assumes absolutely no sales in Russia. With a solid product pipeline and control of costs already generating excellent growth, I believe a resumption of sales in Russia and rebuilding in the Gulf Coast could spark an upside earnings surprise in WMS' fiscal 2007. Of course, nothing is likely to hold up well if this market caves in, so investors need to think about how willing they are to sit through a rough patch. But keep stocks like WMS and the energy plays I mentioned in mind when you're ready to commit to going long. Please note that due to factors including low market capitalization and/or insufficient public float, we consider Seitel and PetroQuest to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.