Drilling Deeper to Find an Oil Play

NEW YORK (TheStreet) -- Recently, the stock market has become less desirable very quickly. Over time I have found that weakness in the market can come on the scene rather fast in a fashion similar to the Indianapolis 500.

Now let's shift to the S&P 500. We have been zooming along at about 200 mph for the past several months, and every week I have been reporting in my newsletter the domestic stock market, small and mid-cap stocks, and biotech, pharmaceutical and the technology sectors are leading the way.

Well, all of a sudden, three things crept up on us: the debt ceiling, taper talk and Syria. They are all big threats, but Syria could be the most dangerous one.

It may lead to nothing and all blow over, but this is definitely not a time to have your foot on the accelerator because there seems to be a muffler on the track of the S&P 500 once again!

That being said, there are also new opportunities arising. On days when the market is down, I handle the day just as I do any other day. I look at my holdings one at a time. Most are holding up just fine despite the new worries. Others are not and those are the ones I want to shed.

Currently, I have had a pretty good-sized position in an income/dividend stock that is oil-related, which seems like a good place to me to be right now considering the troubles going on in the Middle East. In fact, I added to my position recently, which was good timing because the stock continues to hit new highs.

This is a stock that I own in my growth and income accounts. I do not have people invested right now in bonds or Real Estate Investment Trusts earning those dividends and coupon rates. Why? Because bonds and REIT's are interest rate-sensitive and interest rates are going up. Instead, I have an eclectic mix of stocks that pay dividends and also, in my opinion, have the potential for capital appreciation going forward.

One such stock is headquartered in Bermuda -- Seadrill ( SDRL), $21 billion large-cap stock that currently sports a dividend yield of 7.7%. But I am not chasing a dividend here -- that is never a good idea -- and I require more from a stock than that it is simply from an area of the market that should do well given the current conditions in the world. SDRL has the other three characteristics that I like.

Data from Best Stocks Now App

Performance: The first characteristic I look for in a stock is performance, and what a performance SDRL has had over the years!

Data from Best Stocks Now App

Over the last five years while the market has averaged 5% per year, SDRL has averaged over 17%; it has more than tripled the returns of the market.

Over the last three years, while the market has averaged about 15% per year, SDRL has averaged a total return about 34% per year; it has more than doubled the returns of the market.

Also, over the last 12 months, the stock has really been exploding higher. SDRL is up 22.8% while the market is up about 16%. SDRL passes my performance test.

Valuation: The second characteristic I look for in a stock is its valuation. Valuation is critical in my book.

SDRL has been a very good grower over the years. In fact, it has been growing its earnings at a rate of about 15% per year, which is very strong for a company that provides offshore contract drilling and well services internationally through a fleet of several offshore drilling units.

SDRL's earnings are expected to increase 17% this year and another 27% next year. They reported earnings this week and beat earnings estimates quite handily. SDRL is currently trading at eight times forward earnings. It is expected to grow by 22% per year over the next five years. It's trading at a huge discount to its growth rate.

Data from Best Stocks Now App

In fact, the PEG ratio comes in at only 0.48. When I extrapolate out earnings over the next five years, and apply an appropriate multiple, I come up with 77% upside potential. Seadrill passes my valuation test.

Stock Chart: The last characteristic I look for in a stock is a healthy stock chart. When we look at SDRL we see that it has a very good stock chart -- it's hitting new all-time highs and breaking out.

Courtesy of StockCharts.com

So with SDRL we have good performance, good valuation and a very healthy stock chart. It is a stock that I have a big position in and, as I said, I even added to that position recently. SDRL is just another example of a Best Stock Now!

Of the 3,508 stocks that I rank on a daily basis, Seadrill comes in at number 231.

Data from Best Stocks Now App

At the time of publication the author had a position in SDRL.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

More from Opinion

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

Tuesday Turnaround in Politics: Is a Trade War on the Horizon?

Tuesday Turnaround in Politics: Is a Trade War on the Horizon?

Many Chip Stocks Look Cheap Here, as Long as the Economy Holds Up

Many Chip Stocks Look Cheap Here, as Long as the Economy Holds Up

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense

Apple Buys Tesla? Amazon Buys Sears? 3 Dream Mergers That Just Make Sense