Two interesting energy names have been hot on the Zanks Rank metrics for the past month: Basic Energy Services (BAS - Snapshot Report) and Precision Drilling Corp. (PDS - Snapshot Report). Both became Zacks #1 Rank (Strong Buy) stocks in late April as several analysts following the companies boosted their earnings estimates. Since analyst data this week brought about quantitative Rank changes for each -- not once, but twice -- we have a good opportunity to compare the companies as potential investments or trades -- and to look at the how-and-why of a stock fluctuating between being a #1 Rank and a #2 Rank (Buy).
Basic Energy Services provides a range of services to America's oil and gas producers. Its operations span the heartland of domestic onshore production from Texas, Oklahoma, Louisiana and New Mexico to the Rocky Mountain states . Its services support the entire life cycle of a well, from drilling to production and, finally, abandonment. The $1.1 billion company, which has not yet returned to profitability since the 2008 recession, has seen its stock more than triple in the last nine months, rising from below $10 to a 52-week high above $31.50 last month.
BAS became a Zacks #2 Rank stock in mid-January when shares were still trading below $17, as analysts began raising their earnings estimates up from the recession trough. If you had bought BAS on that recommendation, you would have made over a 50% return inside of two quarters as the #2 Rank stuck for over three months. How did BAS become a #1 Rank stock in late April? Further upward earnings revisions, that's how. And in the case of BAS, the boosted estimates really started to heat up in the past few months, as you can see in the table below.
The bearish energy forecasts by Goldman Sachs (GS - Analyst Report) and Exxon Mobil (XOM - Analyst Report) in April -- following the crude oil price spike that was driven by revolutions in oil-rich nations -- sent most energy names into profit-taking mode for much of May. This trend sent BAS from above $30 down below $24. But as a #1 Rank stock, that pullback should have been considered a buying opportunity. And the reversal by Goldman analysts on their energy outlook brought out the BAS bulls, sending the stock up 11% on May 25 and another 4% the next day to close above $27.
On day two of that rally, the Zacks Rank slipped to a #2 Buy. But Friday morning, it was back to a #1 Strong Buy and the shares were up another buck in early trade. Why the flip? The Zacks Rank is a sophisticated quantitative model that incorporates all changes in analyst earnings estimates over the last 60 days and weights the data every night according to a proprietary algorithm, taking into account items like the degree of agreement among analysts, the magnitude of earnings revisions, and the accuracy of top analysts. But a total of approximately 4,440 stocks are in the Zacks Rank universe and only the top 5% can receive the coveted #1 designation.
That means that only about 220 stocks every day can be #1 Strong Buys. So when a stock is found fluctuating between #1 and #2 in any given week, it is most likely because it is right on the cusp and competing with over 200 names to display the strongest earnings revision data for a spot in the top group. For stocks on the cusp, a slight change -- or a dropping off of old data, or no new revisions at all -- can knock them up or down in the Zacks Rank calculations. In the last 30 days, BAS has had a 16% boost in 2011 estimates and a 17% bump in 2012's numbers. And one analyst this week was able to add a penny to the consensus for 2012, which is likely what put the stock back in the top group.
Precision Drilling is Canada’s largest oilfield services company and also has a large and growing presences in the US. They provide contract drilling, well servicing and strategic support to customers with over 350 land rigs. As off-shore drilling faces new regulatory challenges, business is expected to pick up for PDS and their fleet. Currently profitable, this $4 billion company sports a trailing P/E of 25 and a forward multiple of just under 17.
In late December, PDS became a Zacks #1 Rank stock when the name was trading around $10. But subsequent analyst estimates pushed it back down to #3 Rank (Hold) or #4 Rank (Sell) from late January to late April. Then, in the last 30 days, about three-quarters of the analysts covering the stock raised their estimates, causing the Zacks Rank calculation to bring PDS back into the #2 Buy and #1 Strong Buy territory. Today brought a drop back down to a #2 Rank, but the immediate future still looks bright for this stock, especially as it participates in the energy sector rally and builds on strong support from its 50-day moving average this month. The caveat may be in the earnings growth outlook which may be leveling out into next year as seen in this snapshot.
But the main thing to remember about the Zacks Rank, other than its incredible consistency and reliability in predicting stock price movements, is that it is a short-term trading indicator. Since the focus is on the most recent analyst earnings projections from the last 60 days, it is looking at what institutional investors will most likely do with a stock in any given earnings quarter. Another dynamic to keep in mind is that energy stocks tend to be affected as much by crude oil volatitlity as by earnings estimates.
The good news is that if you find the strongest stocks in the sector, you can use the Zanks Rank for timing signals and put yourself on the right side of the money flow most of the time. Buying highly ranked stocks on pullbacks and taking profits after high-probability events -- like positive earnings surprises, upgrades, and upward estimate revisions -- is always a good strategy.