Sweet 16 Update - August 6

[dan_s]

What happened last week is a textbook example of "Market Risk". Sometime, no matter how good a company's fundamentals are, the share price will drop when panic grips the markets. The fact that we have a dysfunctional government and cable news networks fanning the fires of fear 24-hours a day certainly doesn't help.

IMHO "Corporate America" (based on the first half results) is in much better shape than "Government America".

Our Sweet 16 Growth Portfolio took a beating with the rest of the market last week. In addition to the general FEAR that took over the market on Wednesday and Thursday, the price of oil broke major support at $90/bbl. Since the S-16 is heavily weighted to oil, it is going to swing with any major move in the price of oil. If the price of oil stabilizes the portfolio should rebound. The companies themselves are in great shape.

Percentage move YTD:
> Sweet 16: down 6.25%
> S&P 500: down 3.58%

Note: The price of oil is still well above where it was back in January. All of the S-16 companies have reported strong first half operational results. Several are on-track to have all-time record earnings this year.

Percentage move since 1-1-2010:
> Sweet 16: up 67.58%
> S&P 500: up 7.56%

Assuming the price of oil stabilizes, the Sweet 16 is grossly oversold.
> Since last week's update the First Call concensus price targets for seven companies have gone UP (BEXP, XEC, CLR, CRZO, DNR, GPOR, PTEN), five are unchanged (FXEN, GEOI, MIND, PXP, ROSE) and four have been moved DOWN slightly (GTE, PBG, PMG and TGA).
> Notice that all four of the companies that moved down are based in Canada and only PMG has reported 2nd quarter results, which BTW were very close to analysts forecasts. [My updated forecast for PMG will be on the website 8/8 AM.]

Since updating my forecast models for 2nd quarter results, Cimarex Energy (XEC) is the only company on which I have decided to lower my Fair Value estimate (see the forecast for details). XEC's closing price on 8/5 is bearly half of my estimated Fair Value.

Yesterday, we posted a new Company Profile for Continental Resources (CLR). I urge all EPG members to download the profile, read it carefully and study my forecast model. CLR is an incredible growth story. It has 30% annual growth locked in for at least the next five years. CLR's 2nd quarter results beat my forecast, the company has raised its production guidance and they are going to report a stunning increase in their proven reserves this year.

Direct evidence that the stocks are oversold: PTEN reported stunning 2nd quarter results. First Call raised their target price by $4/share to $42/share (which just happens to be my Fair Value estimate). Since the Q2 report the share price has dropped more than $5/share to close at $26.80. Not a single contract for a PTEN rig was cancelled last week and none will be unless the price of oil drops a lot further. PTEN has rock solid fundamentals and it is now trading at less than 4.5X this year's cash flow per share. That is a ridiculous multiple for a company of this quality.

An updated Sweet 16 spreadsheet with all of my Fair Value estimates and the First Call target prices for each stock will be posted to the website on Monday morning. You must be an EPG member and log in to get this information.

[dan_s]

As a group the Sweet 16 is now trading at less than 6.3X this year's cash flow per share estimate.

Those trading at less than 5X CFPS: XEC, GTE, MIND, PBG, PMG, PTEN, PXP and TGA