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Time to buy Precision Drilling?

Also: is the long-awaited correction over, or about to start another leg down?

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Feb 10, 2014

by Max Fawcett

Precision Drilling (TSE:PD) reports its 4Q13 results on February 13, but if FirstEnergy’s Kevin Lo is right you might want to step into the stock before then. That’s because he thinks it’s the most under-bought stock in the drilling space, and that it’s poised to rectify that situation over the near and medium term. “From a valuation standpoint, PD is one of the least expensive drillers in our coverage universe,” Lo writes. “PD trades at a modest 12.4 times 2015e earnings, and 4.9 times 2015e EBITDAs. One nuance for PD is that the financial benefit from the already announced international expansion will not appear until 2015e. This valuation compares favourably to $2 billion market cap companies such as ESI (14 times earnings), PSI (17 times), MTL (14 times) and TCW (17 times). Thus, those investors who are limited by market initialization size will see PD as inexpensive against its large cap peers.” And with the LNG story (that’s seemingly been told for years now) continuing to unfold, Lo says investors will start to turn to Precision Drilling as a way to play it. As a result, Lo upgraded PD from market perform to outperform, and slapped a $12.50 price target on its shares.

In terms of the broader market, last week offered up some decidedly mixed signals, with a furious sell-off on Monday and a recovery late in the week. So is the correction over, or just getting underway? Michael Gayed, the chief investment strategist and co-portfolio manager at Pension Partners LLC, is leaning towards the latter. “Regardless of fundamental, technical or economic analysis, logic must at some point come into the investing equation,” he wrote. “Payroll data again missed expectations in January, with an insignificant upward revision to December’s number. ISM manufacturing suffered a sizeable drop. The deflation pulse is being validated by data, and weather can only be an excuse for so long. Snow today has nothing to do with Treasuries maturing 30 years out. The Fed is tapering, and yields are either on balance falling, or stabilizing. At some point stocks need to pay attention to the reality on the ground.”

That reality, he wrote, may be one in which the Federal Reserve is increasingly powerless to stimulate the economy. “If economic data continues to disappoint, the market will have a hard time justifying last year’s behavior. The rally on Friday was likely due to the belief that bad data means more stimulus. However, if that stimulus is not working to begin with, and the Fed is indeed “pushing on a string,” then with hindsight it will be seen as an opportunity to sell.”

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