Many investors think that stocks trading under $5 are bargains, but this is really not the case. Oftentimes, a stock falls to those levels because of a weak financial performance by the company, because it has flooded the market with too many of its shares, or in some cases, because of accounting or legal issues.
One way to find a true bargain is to look for the stocks of companies who remain profitable and trade at inexpensive valuations compared with their five-year average price-to-earnings multiples. I have scoured the market and found two energy stocks that meet these criteria perfectly, so let’s take a closer look at each companies’ first-quarter earnings results and their stocks’ valuations to determine which would be the best fit for your portfolio.
1. Trinidad Drilling Ltd.
Trinidad Drilling Ltd. (TSX:TDG) operates rigs in the drilling and barge-drilling sectors of the North American oil and natural gas industries. The company is also in the midst of combining its business with CanElson Drilling Inc., which will create one of the newest and largest fleets of oil and gas drilling rigs in North America with a combined 163 gross land drilling rigs.
In the first quarter of fiscal 2015 Trinidad’s adjusted net income decreased 35% to $18.03 million, its adjusted earnings per share decreased 35% to $0.13, and its revenue decreased 22.7% to $194.4 million compared with the year-ago period.
At current levels, the company’s stock trades at 55.4 times fiscal 2015’s estimated earnings per share of $0.07 and 22.8 times fiscal 2016’s estimated earnings per share of $0.17, the latter of which is inexpensive compared with its five-year average price-to-earnings multiple of 23.3.
I think Trinidad’s stock, including the potential cost synergies and growth from its combination with CanElson, could consistently command a fair multiple of at least 30, which would place its shares around $5.10 by the conclusion of fiscal 2016, representing upside of more than 31% from today’s levels.
It is also very important for investors to note that Trinidad pays a quarterly dividend of $0.05 per share, or $0.20 per share annually, giving its stock a 5.15% yield at current levels.
2. Xtreme Drilling and Coil Services Corp.
Xtreme Drilling and Coil Services Corp. (TSX:XDC) is an onshore drilling and coiled tubing services contractor that works with exploration and production companies in the United States, Canada, and international markets.
In the first quarter of fiscal 2015 its net income decreased 4.9% to $2.78 million, its earnings per share decreased 25% to $0.03, and its revenue increased 0.5% to $70.02 million compared with the year-ago period.
At today’s levels, Xtreme’s stock trades at 89 times fiscal 2015’s estimated earnings per share of $0.03 and 15.7 times fiscal 2016’s estimated earnings per share of $0.17, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 151.7.
I think this company’s stock could consistently trade at a fair multiple of at least 25, which would place its shares around $4.25 by the conclusion of fiscal 2016, representing upside of more than 59% from current levels.
Should you speculate on one of these drillers today?
Trinidad Drilling and Xtreme Drilling could generate huge returns for their shareholders over the next few years if they can continue to operate efficiently and further invest in their businesses to drive growth. Foolish investors seeking a speculative play in the energy sector should take a closer look and consider initiating positions in one of them today.
