Diverse Speculative Buying Drives the Rally
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last Friday was a busy day for stocks making volume moves higher. But while the number of stocks making the grade rose, the quality of those stocks was more mixed, suggesting speculation - rather than shrewd value buying - was driving demand. But it was an eclectic group of stocks covering a Medical Device Maker, Flooring Producer, Senior Housing Provider, and Natural Gas Developer amongst others.
Obagi Medical Products (NASDAQ: OMPI) traded over 1.25 million shares on Friday when an average share day for the stock is around 180K. Friday's buying looked driven by the rumor mill of it becoming a takeover candidate following the rejection by shareholders of a Management's Rights Plan, although the Management plan was rejected a full week before Friday's surge. The past three quarters have seen a pickup in inventories, not always a good thing when looking at the big picture, but this doesn't appear to be factoring into the decision making here. The company has a history of coming in above earnings estimates, and revenues from the most recent quarter handily outdid 2010 and 2011 by about 10%. The EPS figures were even better with the September quarter typically its strongest. Analysts have the stock priced at a target of $22, but its relative illiquidity (90% of the shares held by Institutions) and small Float (17.7 million shares) have some suggesting a valuation at $23 a share.
Penn Virginia Corp (NYSE: PVA) is a long way from the $75 range it traded prior to the 2008 meltdown. The company engages in the onshore development of natural gas and oil properties in the U.S., particularly in Texas. The stock reached a nadir of $6.78 in March 2009. However, weak Natural Gas prices meant it could never really enjoy the spoils of the recovery rally; peaking at $27 in 2010 before drifting down to the $4s in 2012. The stock has a similar story to an earlier featured stock, Atlas Pipeline Partners (NYSE: APL). Both are heavily dependent on a recovery in Natural Gas Prices to stimulate a rise in their stock's price. Friday's buying in Penn Virginia (and in Atlas Pipeline) was the first shot in the arm since the stock undercut the March 2009 low in 2011; the stock traded over 4 million shares compared to a more typical 1 million. An evaluation on Penn Virginia by Oil & Gas 360 derived from the company's key assets put a base estimate of $11.58 a share (a "market" case valued it at $41.23 a share) . But unlike Atlas Pipeline, Penn Virginia Corp is a company which is headline-light and therefore off the radar of many; for example, an inside buy of $5,000 was considered newsworthy. It's 3.4% dividend yield also offers a reasonable payout for those willing to hold.
Where Penn Virginia struggles compared to Atlas Pipeline is in its revenue stream. Both companies have experienced erratic earnings, but Atlas Pipeline Partners is at least flirting with consistent profitability, something Penn Virginia can only dream about. Penn Virginia also carries more debt; $718 million (Debt/Equity of 86) to $613 million of Atlas Pipeline (Debt/Equity of 50). As a sub-$10 stock with a Market Cap just a fraction of Atlas', it sits in a more precarious position to withstand continued weakness in Natural Gas Prices, although this risk may be overstated. Admittedly, my money is already in Atlas, but that's not to say Penn Virginia may be the better option for those looking at the merits of both. One key advantage Penn holds over Atlas is that buying momentum is generating new near term highs and attracting fresh demand. Atlas is stuck in a selling rut as it has to contend with supply generated by disgruntled buyers who paid a higher price for their stock earlier in 2012 (myself included!).
The final stock in the hunt is LTC Properties (NYSE: LTC). This is another stock with very high institutional ownership at 82% and a very small float of 29 million shares. However, the stock traded nearly 750 thousand shares last Friday as it pushed past $33.50, the last peak from April. This REIT invests in senior housing and long-term healthcare properties. While many baby boomers are probably still 'too young' to be moving into assisted living, an aging population will mean increased demand for these services. A Harvard study projects the number of households over the age of 65 to increase 8.7 million by 2020. The same study also quoted "pre-boomer households over age 75 will also grow rapidly over the next 10 years and spur demand for housing development that offer both independent and assisted living." This can only be good news for LTC Properties and others in the space like Senior Housing Properties (NYSE: SNH) and National Health Investors. Where the attraction really lies for these three REITs is their yield. LTC Properties pays out a yield of 5.1%, backed by consistent returns on earnings, although both LTC Properties and Senior Housing pay out more in their dividend than they take in earnings per share. Senior Housing Returns and National Health Investors pay out 7.0% and 5.2% respectively, but neither enjoyed the volume buying of LTC Properties. The buying in LTC Properties was not attributed to any single event, but where there is demand there is potential for further price appreciation.
fallond has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.