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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Housing & Credit Part II: Another Pullback Play |
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In my first “pullback buys” article, I went right after the thesis that we are going to have a catastrophe in housing and credit and gave you two stocks that are so misunderstood because of their industry affiliations that they are cheap enough to defend even amidst the terrifically broad selling we saw. The housing play was up 3% yesterday, but that amounts to noise in the move I see that stock having, and the credit play was also up 3% before getting knocked down in the last half hour and finishing up fractionally. More importantly right now, I promised that for each down day we see, I’m going to reach into the bag and pull out another stock that the market has suddenly made a buy. I’ll admit that diving into stocks related to housing and credit might seem dangerous right now and hence many of you wouldn’t want to do that, so here is a stock that is the opposite of the two I previously offered. Global Industries (GLBL), frequent visitors of the site will know, came across the quantitative model at under $18 in early April and has been up over 50% since. In the middle of July, GLBL hit over $29 before being knocked down under $27 the next day by a block seller. The stock started to rally again, but sold off further along with most other things this week, closing under $26. What does Global do, and why is it worth owning? Global Industries is an infrastructure company that primarily works in the energy complex - they do the heavy construction work involving oil fields, pipelines, drilling platforms, and the like. Now, what sort of correlation does that have to do with the housing market, sub-prime lending, and other liquidity? I can’t find any and I think that’s because there isn’t any, but that didn’t stop the market from selling GLBL off by nearly 6%. Oil fields, particularly in Saudi Arabia for those of you who read Matthew Simmons’ excellent Twilight in the Desert, are aging and more work is being needed to maintain production levels. This trend goes hand-in-hand with the need to do more exploratory work to find replacement energy sources in all parts of the world, and Global stands to benefit in both directions. The easiest demonstration of this point is the recent award of a $200 million contract for water injection pipelines into two of Saudi Arabia’s supergiant oil fields; gaining a vote of confidence from the Saudis for such a project should only lead to more business in the future. This comes on the heels of the first major project Global completed in China, which took place in 2006. Of course, such great business conditions should surely mean that this company is trading at a premium valuation as all the analysts get on board, right? Not really. Analyst coverage is fairly light with 7 estimates for the next quarter’s EPS figure (the company reports Thursday, August 2nd) but tepid enthusiasm for the stock (a neutral rating overall) and the company beating estimates by over 30% in each of the last four quarters makes me think this stock has plenty of room left to run. The kicker? Actually, there are a few. Despite GLBL’s aptitude for crushing forecasts, there has hardly been any action in terms of ratings upgrades or upward EPS revisions. Right now the stock has a meager 11.1x EPS multiple and a 13.1x FCF multiple, and with the cash on hand (in addition to about $300M from a recent 2.75% convertible bond offering that I believe was done at reasonable terms) the company plans to initiate a stock buyback. Also, when you buy GLBL, you are investing in a stock with 22% insider ownership. Booming growth coming in a great sector from a company with strong insider commitment (the founder retired as CEO just last year after three decades with the company) showing excellent profitability and a low market valuation? I mean, if the housing market is weak and sub-prime could get uglier, Global is definitely going to get hurt by that. GLBL is a buy. For more on Global and other infrastructure companies, read the Infrastructure Sector Brief. Because this was released so soon after my piece on the economy, you probably missed that. To offset some of the happiness shown here, there are plenty of reasons why you shouldn’t just dismiss the bearish argument on the economy. |