2/25/12
Once
a month, I will be putting out two stock recommendations in a week, with one
being a pure speculative play that should be at least some part of everyone’s
portfolio. While a spec play is
often times a very low priced stock, it doesn’t necessarily have to be. This week, mine is, and is called Quicksilver Resources (KWK). Quicksilver engages in the acquisition,
exploration, development and production of natural gas, liquid natural gas
(LTG) and oil in the US. They own
and operate natural gas and oil fields in Texas, Colorado, Wyoming, and British
Columbia, to name a few.
Now, before I get into the company
specifics, it’s important to know that I am calling a bottom in natural gas
prices. Since putting in a low of
$2.231 per 10,000 million British thermal units (btu) on January 23rd,
it has since rallied to its current price of $2.54 per 10,000 million btus. The day we put in a low, the natural
gas market put in a bullish engulfing line, engulfing the previous five days of
trading. Natural gas has not
traded lower than $2.34 per 10,000 million btu since that time. While I do expect a retest of the low
on this four-year bear market, I think it puts in a double bottom and we
continue on our way to $4 natural gas.
To further illustrate my point, it seems there was market capitulation
on the low as volume on January 23rd was the highest in the last 365
days. Additionally, some of the
largest natural gas producers in the world, Chesapeake Energy, Conoco Phillips
and XTO, are all saying they are going to reduce their production in 2012. With lower production, you get lower
inventories and a rise in prices.
Now, as for Quicksilver Resources,
the stock is trading at an incredibly cheap level of just 2.85x past earnings
of $2.13/share. The stock is down
about 61% over the last 52 weeks due to the drop in natural gas prices, giving
KWK a negative PEG ratio. But
believing the market has bottomed; that should turn around nicely. Quicksilver is a small company with
just $6.6M in cash on hand and about $2B in debt, and a market cap of just over
$1B. As for the analysts, there
are currently 5 buys, 18 holds and 4 underperforms on the stock, with an
average price target of $6.46 and the high target of $11. What really makes this stock a
speculative play is there is currently an astronomical 24% short interest in
this name, so any rally will turn into a short squeeze.
Not only is it a very cheap stock, but
I also believe the bottom is in at $4.14 back on February 1st. That day the stock put in a big hammer,
followed by a bullish engulfing line.
February 1st saw record volume indicating capitulation as
over 20M shares traded hands, compared to an average of just over 4M/day. Since January 18th, the
stock has built a picture perfect inverted head-and-shoulders and has since
rallied through the 50 day moving average of $6.08, which happens to be the
closing price and great entry point on Friday. Drawing an upward trendline from the 52 week low of $4.14,
the stock has since traded down to the line five times and has yet to break through,
showing strong support for the stock.
While I don’t expect KWK to reach it’s 52 week high of $15.98, I think
about a 60% return could be in the cards as the next real level of resistance
should be the 38.2% Fibonacci retracement at $8.66, but I’m looking for a big
rally up to the 50% retracement at $10.06.
Quicksilver reports earnings on
Monday before the bell so you won’t be able to get in beforehand, which could
be good or bad depending on if they can beat the $0.01 EPS that analysts are
expecting. As mentioned
previously, the 24% short interest in this stock could spell for a major rally
on any good earnings. If that
turns out to be the case, wait for a pullback to get long this name. Bottom line…this is a great speculative
position to have in your portfolio and could set up great turns as the price of
natural gas rallies out of the hole.
Full disclosure: I currently am long KWK from $6.09 and plan on adding at
$6.93.
Jeff Lewison
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