Stock Picking in the Stock Market: 5S-5S Portfolio
It has been a week since the proposal of our fictitious portfolio of 100,000 USD based on one top pick among 5 selected sectors. If you didn’t see it, take a look here. The portfolio was published on 23rd of July (Saturday), so the “Buy price” represents the “Open price” on the 25th of July for each stock.
Here is the 5S-5S performance over the past week:
We all know that the stock market is suffering due to a variety of reasons, so I must say that 9,53% isn’t bad at all for just one week. If we keep growing at this rate for 5 years more (240 weeks), we will have the sum of $335 trillion dollars, almost 15 times higher than the GDP of the United States of America.
Damn, we are good. Aren’t we, Powell?
Bad things first: He is telling the truth (at least for one time in his life).
Here is a summary of what happened with the companies for the past week:
Yes. Nothing. And that’s it. Why we’ve got 9,53%? There is no explanation. We could have got -20% and nothing would have changed either. This is one of the problems with market analysts: they try to explain everything. Why the gold has gone up 1%, why the oil has gone down 0,4%, why, why, why.
The market moves. Simple as that. As a long-term investor, you shouldn’t be worried about a week, a month or a year. You shouldn’t be in a hurry to sell something because it has gone up 10%. This is nothing. If you bag this profit, the market will take it back eventually. Aim longer. Aim for a life. Aim for trusting a company during a long lifecycle.
Do with investments as you do it with love and trust. It takes time. As everything in our life.
Stock #1 – Crescent Point Energy – Why?
Crescent Point Energy is a Canadian oil and gas company based in Calgary, Alberta. Even though the company it’s not American, it’s possible to trade it on NYSE (New York Stock Exchange). According to the EIA data, Canada is among the top 5 crude oil producing countries and it has surpassed Iraq in the year 2020:
There are 2 ways that I can tell you why I’m going long on CPG:
- Option #1: I can dive deep into the company’s income statements, history, oil prices and everything else. I can use terms you have never heard of so you may think that I’m an unreachable “God of Investments”. I can also make you believe that you’ll need a product that I’m selling, otherwise you’ll lose all of your money;
- Option #2: I can keep it simple, use a good chart and make you understand the big picture. You’ll need to dive deep yourself.
I’m going with number 2.
It doesn’t matter how good CPG is if Black Gold’s prices are low, right? Let’s take a look at them:
The stocks price chart alone means nothing
I must be sincere with you: I have no idea what will happen with the Oil prices from now on. What I can tell you is that the energy prices are pressuring inflation as never seen before. A war is going on along with a considerable shortage on the supply side and this doesn’t seem to be close to an end. It’s not expected for us to see crude oil at $20 anytime soon.
Since the price chart alone means nothing, let’s take a look at 3 very important things for this company:
- Its stock price, of course, so we can have a sense of opportunity;
- Cash from operating activities. This is the real cash coming into the company to finance its activities and growth;
- Price/CF ratio. It represents the price of a stock divided by the total cash flow per stock. If we consider that the price of this stock is sensible to cash flow growth, then we must analyze this ratio.
What can we learn from here?
Since 2014, the price has dropped consistently. According to this news, the company was caught by an “oil’s rapid fall”. Nowadays, CPG can be considered as a turnaround case. Let’s learn from the past, but make a decision based on the present. The company is cost-effective, profitable, generate cash flow, has low debt, and it’s expanding through key acquisitions.
Since it’s all-time low of $0.68 in the 18th of March, 2020, the stock price has multiplied by 12. Here are my reasons to believe that this stock is still a good opportunity:
- From 2007 to 20014, the Cash Flow from operating activities grew from 337M to $2.1B. Even though the company was hit by a major crisis, the cash flow has proven to be resistant and kept above $1B level. Considering current oil prices, key acquisitions and cost reduction, it has all it takes to keep growing;
- Between 2015 and 2021, the cash flow from operating activities is varying between $1.4B and $1.18B. Almost the same, BUT the Price/Cash flow ratio has dropped from 5 to 3.15x. The company is keeping its cash flow levels (denominator), but the price (numerator) keeps going down and, consequently, the Price/CF ratio is also going down;
- The Oil and Gas Exploration and Production Sector Median Price/CF ratio is about 6x. This is 2 times higher than the current Price/CF ratio for CPG.
All things considered, we have a combination of profit, healthy turnaround, key acquisitions, growing cash flow, increasing oil prices and, of course, at an undervalued price. I’m taking the risk and I’m going long on CPG.
Time will tell if the Black Gold can sparkle.