This is not to change my overall constructive view, and my portfolio is fully invested, with only a smattering of cash as a result of trimming some investments.But for those clients who are highly sensitive to monthly changes, I may begin putting on hedges, or adding some cash. Regardless, picking the right stocks and paying the right price can generate positive returns, and that is where I will focus my attention. One stock that I like is Weatherford International (WFT). The company’s shares have dropped from $45 a few years ago to $26 in early 2011 and then touched $9 in December, after the company had to restate earnings as a result of tax-related inaccuracies in a number of countries where they operate, and also after a variety of governmental probes. WFT has been on my radar for some time, as I like the energy industry broadly speaking and I like turnaround stories too. What really got me interested was studying the list of insiders who have recently purchased shares, which includes the Chief Financial Officer, the General Counsel, the SVP for compliance (who bought 95,000 shares in three separate transactions), the VP for taxes (50,000 shares in two transactions) and several Directors too. These are all outright purchases which took place between November 15, 2012 and January 17, 2013 at prices mostly in the $9 - $11 range. Other insiders exercised options, and while there's no telling for sure why they did, one possible explanation is that they want to start the clock ticking for the one-year holding period for tax purposes. WFT operates in over 100 countries, providing a variety of products that are used in (mostly) land-based drilling. It carries more debt than I would like to see, which, along with the company specific issues, could explain why it trades below peers on a few metrics: 1.0x price/sales ratio (1.6x average for the others) and 1.1x price/book ratio (2.1x for the others), according to The Motley Fool. However, if the company succeeds in addressing these issues, I believe the valuation gap will shrink, if not disappear. And, if energy companies rebound after their poor showing in 2012, the whole complex could get re-rated higher in which case WFT gets an additional bump in my opinion.
There is the risk that falling oil prices would drag down names in the industry, however that is a hedgeable risk. Given all the negative news around the company, the commitments by insiders, and the company's guidance to generating free cash flow in 2013 (in a December presentation), I think shares of WFT offer a compelling risk/reward here and I recommend buying them up to $13.25.Correction: In last month's commentary I stated incorrectly that Tronox's Chairman had bought shares at $25, when in fact it was the company that bought shares at an average of approximately $25 in its buyback program. The Chairman did get shares as part of his compensation. The investments discussed are held in client accounts as of January 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
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