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.