NEW YORK (TheStreet) -- In the business world, I don't believe there's anything more fundamental than the law of supply and demand. But the effects are not all the same. While National Oilwell Varco (NOV) has been a strong player in the energy equipment space, issues that include oversupply -- which has caused customers to scale back on orders -- have made this a tough stock to recommend.
With oil producers now rushing to build equipment and commence drilling projects, NOV's overall business conditions have certainly improved. But there are now other concerns impacting the long-term outlook of the company. Not the least of which is that Merrill Miller Jr., the company's long-time CEO, recently announced that he will step down once the NOV completes the spinoff of its distribution business. On top of all that, these shares, which have gained 23% year to date, are not cheap. And although NOV posted better-than-expected third-quarter results, I believe a near-term pullback is more than warranted.
As I pointed out in my recent article, as with rival Cameron International (CAM), details like NOV's revenue and gross margins are not the driving forces of this stock. Not unlike, say, the tech or financial sectors. What matters most in this industry are the volume of orders received. In that regard, I believe NOV did pretty well both on a relative and absolute basis.
NOV's stock valuation notwithstanding, I was thoroughly impressed with the company's $3.3 billion of third-quarter orders, or 44% year-over-year growth. I don't want to exaggerate the importance of this. It leads to a record backlog in excess of $15 billion, and the performance in orders beats Cameron's third-quarter results by 11%. As I recently pointed out, this was one of Cameron's strongest performances.