DRILLING FOR STURDY STOCKS
Now is the time, says investment adviser Steve Leeb, to be an ''agile investor.'' With the Dow Jones industrial average hitting record territory above the 6,000 mark, investors need to be in stocks that, he says, will be winners regardless of where the market goes from here. ''Pick stocks with a volatility-insurance component,'' suggests Leeb, editor of the market newsletter Personal Finance. Two recommendations: Oil drillers Rowan (RDS) and Parker Drilling (PKD).
''It's a great time to buy these powerful triple plays since demand for rigs far outstrips supply,'' says Leeb, adding that these domestic energy stocks represent political, economic, and market insurance. It's a play on the short supply of oil rigs, as well as on the stiffening price of crude oil resulting from the larger-than-expected worldwide energy demand. One believer in Rowan: George Soros, whose Soros Fund Management has acquired a 4.5% stake. Rowan has charged ahead from 13 in early May to 20 7/8 on Oct. 15. Leeb expects it to post a ''several-fold gain'' over the next two to three years.
Drillers are positively leveraged, Leeb explains, because most costs are fixed. Higher day rates--the rental fees for the rigs--flow almost entirely to the bottom line. Rowan's annual earnings growth could average at least 30% for the next several years as day rates continue to rise. According to First Call, analysts' consensus estimates for Rowan are 62 cents a share for 1996 and $1.03 for 1997, up from a loss of 22 cents a share last year. Rowan owns 21 offshore rigs, operating primarily in the Gulf of Mexico and the North Sea.
Parker Drilling has yet to sizzle, having posted a slim profit of 2 cents a share in the year ended Aug. 31, 1996, vs. 7 cents in fiscal 1995 and losses in 1994 and 1993. Its stock has done little, off from 8 in April to 6 1/2 on Oct. 15.
But the recovery in onshore drilling should fuel a significant rise in cash flow and earnings over the next several years, says Leeb. Parker operates 63 land-based drilling rigs. Analysts expect earnings to jump to 14 cents in 1997 and to 33 cents in 1998. Leeb sees an ''easy doubling'' in the stock price over the next 12 months.
BY GENE G. MARCIAL
Updated June 14, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.