Marathon Could Sprint Even Higher

02/22/2011 1:15 pm EST


Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

The oil driller’s red-hot stock is still not getting the respect it deserves from Wall Street, writes Andrea Kramer of Schaeffer’s Investment Research.

Even though the shares of Marathon Oil (NYSE: MRO) rallied to their highest price since July 2008 last week, Thomas Forester—whose $148 million Forester Value Fund (FVALX) has returned 5.5% annually over the past 10 years—says the stock is still an appealing long-term play.

In fact, he tells (“5 Reasons to Go the Distance With Marathon Oil,” Feb. 15), the security—currently trading below $50—still appears relatively cheap, based on its ratio of enterprise value to cash flow.

"Even at $58," he opines, "the stock may have room to appreciate."

Fundamentally, Forester thinks the Street is underestimating a looming refinery rebound. Escalating auto sales "usually translate into more oil use," he notes, claiming that while "we might be a little early, we want exposure to that world, and we're buying it cheap."

In addition, Marathon has spent the last decade expanding its exploration and production (E&P) operations, which now account for 66% of its revenue. As such, the company's production is expected to grow 5% annually through 2013, which he says "is on the high side for an E&P business."

Contrarian Takeaway
Technically speaking, Marathon shares have been on fire lately, adding 34% since the start of the year. What's more, the security has bested the broader S&P 500 index by 30% during the past 40 sessions. And while Marathon’s charts or fundamental prospects, as highlighted by the Fortune article, could be enough to lure buyers, the outperforming stock could also benefit from an unwinding of skepticism on the Street.

For instance, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.83 ranks in the 99th annual percentile, implying that near-term options traders have been more pessimistically positioned toward MRO just 1% of the time during the past year. In the same vein, Thomson Reuters pegs the consensus 12-month price target on the security at just $49.47—just a hair's breadth from Friday’s closing price.

Should the shares of MRO extend their journey into new-high territory, a reversal in sentiment among the options crowd or a flood of bullish brokerage notes could add fuel to the equity's fire.

[Last week, Curtis Hesler recommended another oil driller despite the risk Mideast turmoil poses to its interests in Egypt. Gordon Pape’s pick works on more hospitable soil, and offers more leverage to the rising price of crude. Marathon is not the only driller to be denied its due, as Jocelynn Drake has noted similarly stubborn skepticism surrounding the rising shares of the largest US company—Editor.] 

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