Two Insiders and Billionaire Dan Loeb Love This Stock

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Two company officers at oil and gas equipment and services company Weatherford International (NYSE: WFT) have bought shares since the middle of December. According to filings with the SEC, Vice President James Parent and Senior Vice President Dharmesh Mehta each bought 30,000 shares, at prices generally between $10.50 and $11 per share. As of this writing the stock trades towards the upper end of that range, and is down 30% for the year. Mehta has been buying quite a bit of Weatherford shares this year, including 25,000 shares in mid November (see a history of Mehta's insider purchases). Studies show that stocks bought by insiders tend to outperform the S&P 500, and this makes sense to us as insiders should avoid buying more of the stock, preferring instead to diversify, unless they are very confident in the company. Consensus insider purchases, such as what we see here at Weatherford, are particularly bullish signals and so we think it would be useful to research the company further.

We recently named Weatherford as one of the highest-upside stocks in billionaire Dan Loeb’s portfolio, going by the five-year PEG ratio (see Loeb’s top stock picks). Specifically, the five-year PEG is 0.5 as a result of high growth expectations and moderate multiples (the forward P/E is 10). Orbis Investment Management, managed by William Gray, also liked the stock: According to Orbis’s 13F filing, Weatherford was one of the five largest holdings by market value in its portfolio at the end of September.

North American revenue increased 7% in the third quarter compared to the same period in 2011; a little less than half of Weatherford’s sales are in that geography. Strong performance in the rest of the world pulled total revenue up 13%. Operating and net income both declined, however, primarily due to lower gross margins. For the first nine months of 2012, operating income was about even with the same period in the previous year before deducting special items realized in H1 2012. Investors should be aware that the stock’s beta is 2.2, as a result of factors such as leverage and drilling’s reliance on energy prices (which in turn are driven by the global economy).

Weatherford’s pricing seems about even with many of its peers in the equipment and services side of the oil and gas business. Halliburton (NYSE: HAL), Baker Hughes (NYSE: BHI), Schlumberger (NYSE: SLB), and National-Oilwell Varco (NYSE: NOV) all have forward earnings multiples in the 10-14 range. So Weatherford is towards the lower end of that range, but as we’ve noted it has had some special charges recently, so perhaps it makes sense to see a small discount, especially against market leaders like Schlumberger. Of course, it didn’t perform well on the bottom line either; while Baker Hughes and Halliburton saw their net income decline as well, Schlumberger and National Oilwell Varco each reported an increase in earnings versus a year earlier. Halliburton and Schlumberger also made our list of the most popular energy stocks among hedge funds for the third quarter of the year (find more energy stocks hedge funds love). Being tied to oil and gas activity, these stocks all have a beta of at least 1.7 so none offers that much more downside protection, at least statistically, than Weatherford.

While there is consensus insider buying at Weatherford, the company doesn’t look particularly attractive relative to its peers. Some comparable companies are trading at similar forward valuations and either post a better market cap, better recent financial performance, or both. We’d keep the insider buying in mind but advise any interested investors to look at other stocks in the industry as well.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in HAL. The Motley Fool owns shares of Halliburton Company. Motley Fool newsletter services recommend Halliburton Company and National Oilwell Varco. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus