Dumb Money Alert: Don't Buy This Energy Stock

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You would probably think "accountant" or "average cubicle guy." Actually, he was a lawyer until he unlocked this secret that made him $5,000,000.
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Dumb Money Alert: Don't Buy This Energy Stock

10/20/2016 By John Persinos

We all know the expression that a fool and his money are soon parted. But as we observe the irrational actions of energy traders lately, it begs the question: How did these fools and their money get together in the first place?

Case in point: The irrational exuberance now bidding up the shares of oilfield services giant Schlumberger (NYSE: SLB). In recent weeks, analysts have been bullish over Schlumberger. Most recently, the strategists at investment banking firm Societe Generale upgraded Schlumberger to "Buy” from to Hold.”

Don't believe them. As we explain below, SLB is a stock to avoid.

To be sure, oil prices have generally recovered from their lows of around $20 a barrel posted in February, but they're still whipsawing investors. And potential triggers abound for another collapse in oil prices.

Meanwhile, OPEC is at it again and is desperately trying to finalize an oil production cut reached in Algiers last month. First the Saudi-led oil cartel wants to throw open the spigots, and then it wants to tighten them. Negotiations are scheduled with big fanfare; then they just fizzle.

Through it all, the price of oil has been on a wild roller coaster ride. It's enough to make investors reach for the Dramamine. Amid this uncertainty, at least one thing is certain: oil price volatility is here to stay.

Which brings us to oilfield services firm Schlumberger, shares of which have risen nearly 19% year to date, compared to a gain of 6.75% for the S&P 500 and a gain of 11.5% for the benchmark iShares US Oil Equipment & Services ETF (NYSE: IEZ).

Several analysts are now bullish on SLB; we beg to differ.

For starters, this oil price rebound is tentative at best. All it would take is poor economic data in the U.S. or an overseas crisis to send oil prices reeling again.

Meanwhile, the latest oil inventory and supply data is bearish, amid global economic growth that's on track but tepid at best. Expectations that indebted and struggling Schlumberger will somehow reverse its fortunes in the face of these headwinds are wildly optimistic.

Schlumberger provides the equipment needed for companies to find and drill for energy sources, including seismic services, well completions, drilling equipment and pressure pumping. The company's global roster of exploration and production clients have drastically cut back activity and show little sign of even remotely returning to the "go-go” days when oil hovered at $80 to $100 per barrel and SLB took on debt to expand.

With a market cap of $114.5 billion, SLB's return on equity (ROE) is 3.97%, compared to the average ROE of 5.4% for its peers. The oil and gas services industry's net profit margin is 3.8%; SLB's is -5.64%. The average analyst estimate for SLB's earnings per share (EPS) for full-year 2016 is $1.12, compared to $3.37 in 2015.

With total debt of $21.66 billion, SLB's total debt-to-equity ratio stands at 0.51, only slightly lower than the industry's unacceptably high ratio. Oil prices are indeed higher this year, but they're barely touching the $50 per barrel threshold that the industry needs to break even. At least 58 producers have filed for bankruptcy so far in 2016, representing about $50.4 billion in debt, far exceeding last year's $17.4 billion debt accumulated from the 44 companies that went belly up.

Don't get fooled: SLB could easily start tumbling again. The notion that oil markets will find equilibrium is a myth. More than ever before, oil prices are fluctuating with the ebb and flow of investor passions. Ignore all of the yapping on CNBC and in the financial press. Oil price predictions are tales told by idiots, full of sound and fury, signifying nothing (apologies to Shakespeare).

Through it all, volatility seems here to stay. Our advice: Stay away from Schlumberger, at least for now. The energy markets remain too volatile and SLB is too vulnerable. There are better places for your money.

As we've just explained, Schlumberger is a stock to sell or avoid right now. If you're looking for better moneymaking opportunities, there's an ingenious trade that allows you to make money on the price of oil, regardless of whether it goes up or down. It's a trade that has you covered on both sides. For this trade to make money, the price of oil merely needs to keep moving. Amid all of the uncertainty in today's energy markets, at least one thing is certain: Oil price volatility is here to stay. To learn the details of this energy trade, click here.

Bet on Energy, Without Losing Your Shirt

The volatility in the energy patch these days is enough to make you reach for the Valium.
But if you want to make a bet on energy without the risk of losing your shirt, there's a powerful investing methodology that makes money from oil-price volatility, whether oil is moving up or down.
Oil prices happen to be on the upswing right now, but as we've seen, this oil recovery doesn't necessarily have momentum. Oil could easily start falling again.
That's why conditions are ripe for this simple move.

Twitter Burns the Bears

By Linda McDonough

Short interest in Twitter (betting that the stock would fall) fell precipitously just before its recent decline. Twitter, the social media/messaging app known by its bluebird silhouette, raced up almost 40% to $25 earlier this month on takeover rumors. When the buyers failed to appear, its wings were clipped and it fell hard and swift back to $17. Unfortunately for the bears, they had removed a large chunk of their bearish bet just before the stock fell.

Such is the life of a short seller. I spent 25 years shorting stocks and this scenario is sadly familiar. While short sellers must be correct that the fundamentals of a stock are unwinding, it is equally, if not more important, that they be accurate on the timing of the short bet.

The abrupt rise of Twitter's stock shows how just seven days of poor timing can produce a mountain of losses for a short seller. In addition, a short bet carries unlimited risk which can wipe out even the most experienced trader. For these two reasons subscribers of my Profit Catalyst Alert newsletter will see that I recommend put purchases on the stocks I am most bearish on.

The short interest in a stock is measured by the percent of shares trading that are sold short. For Twitter, the short interest fell from 7% of total shares on Sept. 22 when the stock was $23 down to less than 4% on Oct. 5 when it began its downward spiral.

Most traders, who were likely underwater with their bearish bets, were forced to buy back or "cover” as the stock raged upward and their losses mounted. This forced covering is often known as a short squeeze, a term sounding oddly affectionate but is morbidly painful for those on the receiving end.

Twitter has been a particularly difficult short. The company has lost anywhere from $79 million to $162 million per quarter since early 2014 and has never earned a dime. The stock traded on hype and dreams of future profits, an elusive hope for a company with geometrically expanding expenses.

Although a serial money loser sounds like a dream short, a stock like this can be most difficult for the bears. If the bulls are totally comfortable with Twitter losing money for an indefinite period of time, the bears had to look elsewhere for news that would disappoint bullish investors.

That number was revenue growth, which has slowed dramatically for Twitter. The stock's biggest decline came in June 2015 when revenue growth dropped from 100% to 74%. Yet even after that drop the stock jumped 50% for a short period.

Luckily for the bears, the Chicago Board Options Exchange (CBOE) is continually adding longer term options (called LEAPS) and more frequent expiration dates for an increasing number of stocks.

Most shorts feel lucky if they can narrow down the timing of a stock's decline to a two quarter period. With even the smartest analysts out there working with such a wide time frame, buying puts that expire 6 months out will often capture the expected plunge of a stock.

Like anyone who survives in the woods eating raw meat, most bears are tenacious and wily animals. Short selling is surely not for the faint of heart but with sharp claws and a cap on losses it can produce tremendous returns.

Warren Buffett's Secret Retirement Plan

Let's be honest: Warren Buffett's hedge fund, Berkshire Hathaway, has made a lot of people rich.
If you had invested just $1,000 with Mr. Buffett in 1964, at the very beginning, you would be sitting on over $10 million today!
And even as late as 1978, one thousand would still have turned into one million today.
But Warren Buffett isn't getting any younger. What will happen when he retires?
There were rumors a few years back that a strange, quiet author would take over Berkshire Hathaway.
His one and only book, written in 1991, is reported to have turned a handful of regular investors into multi-millionaires.