First, some background: Forum is an oil and gas service stock with both on-land and subsea drilling, production and infrastructure businesses. It’s a small-cap stock with a market capitalization of about $2.4 billion, with about $1.4 billion in fiscal 2012 revenue. It does not pay a dividend and is up about 5% year-to-date in 2013, half the gains seen by the S&P 500.
In nutshell, I would avoid Forum Energy Technologies stock. Here’s why:
Earnings and Guidance: Earnings were in-line recently for Forum, but margins were weak and net income rolled back. More damningly its guidance was moved down. Q2 estimates were 42 cents and the range is now 35 to 40 cents. FY 2013 was $1.83 on average and the range is now $1.70 to $1.80 — down from $1.80 to $1.90 in previous guidance. This downward movement in Forum Energy Technologies stock is not a good sign.
Insiders and Experts are Selling: For what it’s worth, the “smart money” is selling. Total hedge fund interest has been moving down lately in Forum Energy Technologies, and insiders are selling briskly. The last few months have seen a host of insider sales, and that could be a warning sign. (Look at the insider history here on Yahoo! Finance for details.)
Weak Energy Market: Overall, natural gas companies are rolling back production due to oversupply in recent years thanks to a fracking boom, and that doesn’t bode well for Forum’s nat gas operations. Crude oil isn’t quite as bad, but the outlook is still soft as global demand remains flat. Consider that China, once an engine of growth and consumption, may see just a 5% bump in crude demand this year.
Better Options: If you are long-term bullish on energy and want to play exploration and service stocks, then there are much better options — Transocean (NYSE:RIG) is a deepwater powerhouse, and Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) are service giants with huge reach and modest dividends to boot. If you want to be early to a cyclical recovery, these lower-risk options seem to make more sense to me.
Forum may not bankrupt you, and could be fairly valued at current prices. But downward momentum in forecasts coupled with a soft energy market makes me skeptical about buying FET stock now. And if you’re looking for a long-term cyclical recovery, there’s no compelling reason to pick Forum Energy Techologies over the alternatives.
Anyway, just my two cents on this pick.
- More caution on Forum Energy, and great details on insider transactions. (Insider Monkey)
- Could crude crash in 2013? (The Market Oracle)
- Louis Navellier says a strong dollar will keep crude and commodity prices low. (The Slant)
- If you’re interested in oil majors, here are some ideas from Anh Hoang. (The Motley Fool)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.