Beginner investors often think that stocks trading under $3 are bargains, but this is not the case by any means. More often than not, stocks fall below $3 because of a weak financial performance by the company, because it has flooded the market with too many of its shares, or because of accounting or legal problems.
One way to find a true bargain is to look for the stocks of companies that remain profitable and trade at inexpensive forward valuations compared with their five-year averages, because it provides fundamental support to your speculation. I have scoured the market and found two stocks from the energy sector 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. Bankers Petroleum Ltd.
(All figures are in U.S. dollars)
Bankers Petroleum Ltd. (TSX:BNK) is a Canadian-based oil producer with operations in Patos-Marinza, the largest onshore oilfield in Europe.
In the first quarter of fiscal 2015, its net income decreased 96.5% to $879 million, its earnings per share decreased 96.9% to $0.003, and its revenue decreased 50.1% to $72.4 million compared with the year-ago period.
At today’s levels, Bankers stock trades at 50.8 times fiscal 2015’s estimated earnings per share of $0.05 and 36.3 times fiscal 2016’s estimated earnings per share of $0.07, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 82.5.
I think the company’s stock could consistently command a fair multiple of at least 50, which would place its shares around $3.50 by the conclusion of fiscal 2016, representing upside of more than 37% from current levels.
2. Delphi Energy Corp.
Delphi Energy Corp. (TSX:DEE) is a Calgary-based company that explores, develops, and produces oil and natural gas in western Canada.
In the first quarter of fiscal 2015, its net income increased 175.9% to $2 million, its earnings per share increased by $0.01 to $0.01, and its revenue decreased 53.8% to $22.65 million compared with the year-ago period.
At current levels, Delphi’s stock trades at 43.3 times fiscal 2015’s estimated earnings per share of $0.03 and 21.7 times fiscal 2016’s estimated earnings per share of $0.06, both of which are inexpensive compared with its five-year average price to earnings multiple of 184.4.
I think this company’s stock could consistently trade at a fair multiple of at least 40, which would place its shares around $2.40 by the conclusion of fiscal 2016, representing upside of more than 84% from today’s levels.
Could your portfolio use a speculative stock?
Bankers Petroleum and Delphi Energy could generate significant returns for their shareholders if they can operate efficiently and further invest in their businesses to drive growth. Foolish investors seeking a speculative play should take a closer look and consider initiating positions in one of them today.