Finding Values in Energy and Gold

05/17/2007 12:00 am EST

Focus:

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo's Insiders Plus, goes through his top choices among energy and gold stocks and says there's still good upside opportunity in some of them.

Dawson Geophysical (NASDAQ: DWSN ) is up nearly 60% year to date and reported spectacular results again this quarter. Revenues grew 50% to $59.9 million, operating margins improved by 180 basis points, and earnings per share rose 22% to 71 cents a share. The relatively low ratio of earnings growth to revenue growth was again due to the addition of new crews and equipment which raised salary and depreciation expense. Like last year, those expenses will be offset when the new crews get up to speed. The company's order backlog is fully booked for 2007 and partially into 2008.

On a price/earnings-to-growth basis, Dawson shares aren't expensive, despite the big run-up. Its P/E of 21x is more than justified by its current growth rate. Still, these shares are extremely volatile, so, while you should definitely hold them for the long term, skimming some cream off the top couldn't hurt, either. (The stock closed Wednesday around $53-Editor.)

Elsewhere in the energy sector, producer Devon Energy (NYSE: DVN ) reported $1.44 per diluted common share for the quarter, compared with $1.56 last year. Anadarko Petroleum (NYSE: APC ) made 23 cents per share compared to $1.42 per share. The stocks are still holding up well because higher energy prices are expected to remain with us through the year.

Anadarko is still up nicely from its February low. It has another few dollars to go, however, before it reaches its previous high above $55, while Devon is very close to its all-time peak. Devon is well above our buy range for now. Anadarko Petroleum is a buy up to $52.50. (It closed Wednesday just above $47-Editor.)

Among our gold companies, Barrick Gold (NYSE: ABX ) finally picked up some steam [a couple of weeks ago], in part due to a new recent high in the bullion price, [when July futures reached] $689 per ounce. But the greater impetus for the rise was the company's announcement that it had finally worked off all the hedges it had inherited from its Placer Dome acquisition. Barrick actually reported a loss for the quarter after taking a charge of $557 million to fully exit its hedge book on current production, a move that allows the company to sell its output at spot prices rather than at the lower prices previously contracted.

The loss reported is an opportunity loss, rather than an actual cash loss. It represents the difference in revenue the company received for its product, and what it would have received at spot prices if it hadn't pre-sold production. The company will take another 8ยข per share in the second quarter on the last of the hedges it closed in April. Barrick Gold is a buy up to $32. (It closed Wednesday just below $30-Editor.)

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