Buy This Undervalued Oil Services Firm for a Short-Term 23% Gain

NEW YORK (TheStreet) -- With a book-to-market ratio of 1.22, Superior Energy Services (SPN) is incredibly undervalued and ripe for a rebound. Trading at roughly $22, Superior Energy Services would be fairly valued at almost $27. Buy SPN now for a built-in gain of roughly 23%.

The energy sector has taken a beating over the past year as the price of oil has dropped in half. But now that oil appears to have bottomed out, investors are beginning to look for bargains in this battle-scarred landscape.


Almost every energy stock looks cheap compared to its price a year ago, but that doesn't mean they are good bargains. Some companies will recover quickly, while others may take years to overcome the damage done to their balance sheets.

It is at times like this that we turn to one of our favorite "quant" gurus and our "book market investor" formula based on the investing strategy of accounting wizard Joseph Piotroski.

Piotroski is famous for evaluating stocks based on their book value compared to their market value to identify companies that have become oversold. One such company is Superior Energy Services, which earns a perfect score of 100% from our Piotroski formula, meaning it's a good buy.

Worth More Than Its Price

At the moment, Superior Energy Services has a book to market ratio of 1.22, which implies that the company is worth more than what the stock market says it is worth. That places the company in the top 20% of all the companies we evaluate, qualifying it for further scrutiny.

But sometimes companies are priced at a discount for a good reason, such as deteriorating financial condition. So, we looked at several other ratios that tell us if the company is still growing, such as the change in its return-on-assets (ROA) ratio, a measure of how profitably a company is versus its assets.

The company has improved its ROA ratio from 0.61% to 3.64% in the most recent year, while its ratio of long-term debt to long-term assets has remain unchanged. Combined with an increase in the ratio of its current assets compared to current liabilities, this suggests that the company has managed to improve its profitability in the face of declining oil prices without taking on additional debt.

That's a difficult trick to pull off, especially in the very competitive field of oil exploration and development. In the long run, the type of extreme financial stress that has occurred in the energy sector over the past nine months has the effect of eliminating the weakest competitors, while strengthening those that survive.

Superior Energy Services, as its name implies, serves the drilling, completion and production-related needs of oil and gas companies worldwide. It employs over 14,000 employees, and CEO David Dunlap believes that SPN is in a good position with its staffing and cost structure to economically support current levels of business. In other words, they're not bleeding like many energy companies, and they're ready to start growing again.

Dunlap told CNBC in early June that, "we are beginning to get close to a bottom from a cost standpoint. The market is not going to get a lot better in the next few quarters, but we'll see some overall signs of stability in activity and that's going to drive some stability in the labor force as well."

If Piotroski's investing philosophy is correct, then Superior Energy Services will be one of the strong that survive and should soon see its stock price appreciate. In the meantime, it pays a healthy 1.4% dividend yield, and could raise that dividend in the future as oil prices rise.

To learn more about why Piotroski would think this comapny is a good buy, watch this video explanation with Baton Investing chief strategist, Jim Pearce.

Baton's short-term trading portfolios will likely cash out of Superior Energy Services as soon as it rebounds to a proper valuation. As Benjamin Graham famously said, "In the short run, the market is a voting machine but in the long run, it is a weighing machine."

Our long-term portfolio, however, will likely hold the company until oil rebounds and pushes the stock back up to its 52-week high of $37 for a 68% gain.

This article is commentary by an independent contributor. At the time of publication, the author held SPN.

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