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Investment Ideas

The volatility seen in the oil markets over the last two years has been pretty amazing. Since late 2014, crude oil went from over $90 a barrel, to under $30, and now back over $50. The latest move higher in oil looks sustainable, as OPEC members have agreed to reduce global supply. The panic that swept over the oil market in early 2016 are all but gone, as the glut has been reduced and demand has remained moderate.

There is a strong likelihood that oil will settle into a trading range here in the $50s. If price can stabilize investors will feel more comfortable taking risk. This will allow riskier oil stocks to come into favor and provide investors with a chance for larger percentage returns.

Below I review four “cheap” stocks that are poised to succeed if oil can stabilize and remains above $50 a barrel. These stocks aren’t necessarily value stocks, but there are priced under the $10 mark. This makes them attractive to retail investors that view them as affordable. Once these stocks get going the momentum can bring them to ridiculous levels, where profits must be taken.

To find the  stock I used the Zacks Stock Screener with the following search:

-Zacks Rank <= 2

-Sector equal to Oils-Energy

-Last Close <= $9.99

The List

Comstock Resources (CRK - Free Report) is a Zacks Rank #2 (Buy) that is an independent energy company, acquires, develops, explores, and produces oil and natural gas properties in the United States. Its oil and gas operations are primarily located in East Texas/North Louisiana and South Texas. The company owns interests in 1,575 producing oil and natural gas wells. Comstock has 125 employees and is based in Frisco, Texas.

The company has a market cap of $100 million so it’s on the smaller side. The stock sports Zacks Style Scores of “D” in both Growth and Value. With the price of oil headed higher, watch for these scores to improve.  

Looking at the chart below, Comstock’s stock price has been devastated as the price of oil has gone lower. But with oil over $50 again the stock has come back to life, almost tripling off of its 2016 lows. Earnings are on November 2nd and a surprise to the upside on EPS could keep the recent run going. Analysts have been revising estimates higher over the last 90 days, with the current quarter being revised 27% higher.

Weatherford International (WFT - Free Report) is a Zacks Rank #2 (Buy) that operates as a multinational oilfield service company worldwide. It offers equipment and services used in the drilling, evaluation, completion, production, and intervention of oil and natural gas wells. The company operates through three business groups: Formation Evaluation and Well Construction, Completion and Production, and Land Drilling Rigs. Weatherford has 39,500 employees and is based in Switzerland.

The company has a market cap of $5 billion and a beta of 2.34, so it is extremely volatile. The volatility is due to questions of the price of oil and the company’s ability to profit from lower oil prices. With the recent rise in price, expect the stocks Zacks Style Scores of “D” in both Growth and Value to improve.

Like Comstock, Weatherford has fallen hard with the price of oil. The company has beaten on EPS four out of the last five quarters. Earnings will be after the market close on October 25th, look for a big jump if we see another upside surprise.

Kosmos Energy (KOS - Free Report) is a Zacks Rank #2 (Buy) that explores for and produces oil and gas in Africa, Europe, and South America. Its asset portfolio includes production and other development projects in offshore Ghana, as well as exploration licenses with hydrocarbon potential in offshore Portugal, Sao Tome and Principe, Suriname, Morocco, and Western Sahara. The company was founded in 2003 and is based in Hamilton, Bermuda.

The company has a market cap of $2.5 billion, trading at $6.50 a share. The stock sports Zacks Style Scores of “D” in both Growth and Value, but has a “B” in Momentum.

Kosmos has shown improvement in EPS and has seen revisions from analysts that expect the company back in the black in 2017. In addition, estimates for the current quarter have gone 38% higher.

Ultra Petroleum (UPLMQ - Free Report) is a Zacks Rank #1 (Strong Buy) that is an independent oil and gas company. Ultra engages in the acquisition, exploration, development, operation, and production of oil and natural gas properties. The company’s principal business activities are developing its natural gas reserves in the Green River Basin of southwest Wyoming the Pinedale and Jonah fields; its oil reserves in the Uinta Basin in northeast Utah; and its natural gas reserves in the north-central Pennsylvania area of the Appalachian Basin. Ultra has 167 employees and is based in Houston, Texas.

The company has a market cap of $800 million, trading just above the $5 mark. The stock sports Zacks Style Scores of “C” in Growth, Value and Momentum.

Ultra is seeing some impressive revisions higher to estimates. For the current year, number have been taken 327% higher over the last 60 days, from $0.18 to 0.77. For fiscal year 2017, revisions are up 44% over the last month, from $1.75 to $2.53.

In summary

Oil stocks move directly with the price of crude oil. As long as oil remains over $50, the riskier oil stocks look tempting. Back under $50 is reason for caution, but could bring about bargains for a longer term bounce. The danger zone would be back under $40, but that looks like a risk that is long past the oil markets. 

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