EPG Target Price & Efficient Market Theory

[wilmawatts]

You know Dan, I wonder if a EPG member bought when you increased the target price of a holding and sold when you decreased the target price of a holding what type of return they would get?

I expect as you quickly incorporate new production data and news into your EPG reports this information is not efficiently reflected in the share price in a timely manner. During the lag an investor can jump in and harvest excess returns. The energy sector is generally not loved by Wall Street, or by many others for that matter. The market efficiency I expect is low.

Look at NFX for example, three times they have upgraded their guidance in the last 6 months and I think you have upgraded the price target at least that many times and they still sort of wallow sideways compared to the Permian plays that are much more expensive on a cash flow basis.

Just a thought. Have you generally seen stock prices move in the direction of your price target revisions? Of course this is a non-scientific question and most likely you will remember the stocks that move as expected - but then again maybe not, sometimes it is the surprise you remember.

I am long PE, REI, CPE, NFX, EPM, GST, GST/PA, DNR and a small amount of SARA (the last is an entirely speculative post bankruptcy play, the company had its debt discharged but has few assets other that tax loss NOL's and a few leases and a shell but I have seen worse). I sold FANG on valuations only, I like those guys.

[dan_s]

My Sweet 16 Growth Portfolio has been around since 2001. Over time, the stock prices tend to move to my valuations. Some move a lot faster than others. One reason is that the "Wall Street Gang" falls in love with a region. Right now they are head over heals in love with the Permian Basin. There are good reasons for this love affair, but the well level economics are as our good or better in SCOOP/STACK. It is a much smaller area than the Permian and only five public companies (CLR, NFX, DVN, XEC and MRO) control a high percentage of the Tier One leasehold.

A good example is SM Energy. For years SM traded at more than a 100% discount to my valuation. I beat the hell out of my valuation model and could not see what I was missing. This year, SM is up 81% YTD and within 37% of my valuation. Sometime it takes a long time before Wall Street figures out the value of a company. It can be quick frustrating for investors.

It is important to remember that my valuations are based on production growth and commodity price assumptions. If I'm wrong about oil & gas prices, then my valuations may be way off.

One of the great tools provided to EPG members is my macro driven forecast/valuation models. EPG members can download them to Excel and change the production and commodity price assumptions at the bottom of each spreadsheet to see how the changes will impact EPS, CFPS and stock valuation. I have also starting putting First Call's operating cash flow per share forecasts in a red box on each spreadsheet, so you can see how my CFPS forecasts compare to First Call's forecasts.

Remember:
1. It takes HARD WORK to beat the market
2. Tools are only good if you use them
3. Cash flow pays the bills, not earnings.