Wall Street's Buy List
Actions speak louder than words, as the old saying goes. So why does the media focus so much attention on what Wall Street says about companies, instead of what it does with them?
Once upon a time, we didn't know what the bankers were up to. Now, thanks to the folks at finviz.com, it's easy to keep tabs on the stocks that financial institutions buy and sell. And the 170,000-plus lay and professional investors on Motley Fool CAPS can lend us further insight into whether these decisions make sense.
Here's the latest edition of Wall Street's Buy List, alongside our investors' opinions of the companies involved:
(out of 5)
|Linn Energy (NAS: LINE)||$37.52||*****|
|Kodiak Oil & Gas (NYS: KOG)||$10.52||***|
|Samson Oil & Gas (ASE: SSN)||$2.88||***|
|China North East Petroleum (ASE: NEP)||$3.26||**|
Wall Street vs. Main Street
Up on Wall Street, the professionals think these four stocks are the greatest things since sliced bread. And can you blame them? All of Wall Street's favorite stocks this week, named above, are tied to the oil industry. And with the price of Brent crude recently blowing right past predictions to land at $125 a barrel, the prospects for oil stocks look bright indeed.
Pundits are predicting we'll see $5-per-gallon gas in short order. With an election looming, the President is apparently even being urged to release the strategic oil reserve. Oil is just that expensive -- and oil companies are just that profitable. But which of these stocks is the best way to play the trend?
Is it China North East Petroleum, perhaps? At just three times earnings, it's certainly the cheapest of the bunch ... but after high-profile troubles with Chinese small-caps, investors are likely to be hesitant when something looks too cheap to be true.
Kodiak? Samson? On the plus side, they do business mainly in the United States (although Samson's actually based in Australia). On the minus side, neither one generates a single red cent worth of free cash flow; and from an earnings perspective, Kodiak looks pricey at 59 times trailing earnings -- and Samson doesn't earn any profit at all!
In contrast, Linn Energy boasts a 15x earnings ratio, a strong dividend (7.4%) and respectable growth. (Only 5% per year projected for the next five years, but with profit margins as high as they are these days, even mighty ExxonMobil (NYS: XOM) is only expected to grow at less than 9% going forward.) Could Linn be the line you want to cross?
The bull case for Linn Energy
A lot of Fools think so. Five-starred on CAPS, Linn wins high praise from All-Star investor fooluser17, who likes "the numbers and dividend (which has been rising) a LOT."
Fellow All-Star katinga is a fan of Linn's "expert hedging strategy against declining natural-gas prices. Tax efficient due to depreciation write-offs."
Indeed, the Fool's own TMFAimeeD points out that "100% of [Linn's] natural gas production [is] hedged until 2015." (At prices much higher than the current going rate, by the way. And Linn's oil is likewise hedged, with 80% of production guaranteed to fetch prices close to $100 a barrel through 2015. So if oil does somehow get cheap in a hurry, it shouldn't hurt Linn much at all.)
Foolish final thought
Now mind you, an investment in Linn is not a "lock." In fact, Linn's no better than Samson or Kodiak in at least one respect: Although Linn has generated free cash flow in years past (2009 and 2010, to be precise), it's currently burning cash just like the rest.
If you want to be sure of benefiting from the booming oil market, therefore, you might be better advised to stick with a giant like ExxonMobil. While Exxon pays a less-generous dividend than Linn does, at just over 10 times earnings, Exxon's definitely the cheaper way to play the oil boom. Exxon's growing faster than Linn, and it has a record of consistently producing free cash flow that goes back at least 20 years.
Sometimes, the obvious choice is the best one -- but even Exxon isn't the only right way to play the oil boom. Read the Fool's new report, and we'll tell you all about three other stocks we think are good places to put your money in a world of $100-per-barrel oil.
At the time this article was published Motley Fool newsletter serviceshave recommended buying shares of Exxon Mobil, but Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 407 out of more than 180,000 members. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has adisclosure policy.