Higher Oil Leads to Run-up in Oil Services and Alternative Energy
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Your Daily Profit

April 7, 2009

*****16% Gains on Graham

*****Oil Prices and Alternative Energy

*****Earnings Season

Fellow investor,

I sure hope Daily Profit readers bought some shares of Graham Corp (AMEX:GHM) when I suggested it in the March 19 edition. Graham closed at $9.33 that day. Today, it’s pushing $11 a share for a 16% gain.

Graham is exactly the type of stock I love. It’s in an important sector (oil services), it has a pristine balance sheet with virtually no debt, it generates plenty of cash and it has a solid backlog.

Graham is rallying now because it is announcing new orders — $6 million worth in the last week. That may not sound like much, but when you’re doing around $100 million a year, $6 million is significant.

Among other things, Graham helps oil refiners retrofit their equipment so it can handle heavy or “sour” crude, like what comes from oil sands production. Oils sands production is more expensive than the oil we get from OPEC. Oil sands companies are break even with oil in the $50 range.

Graham hit $54 a share when oil prices were hitting their highs. Oil sands production was ramping up and refiners were investing to accommodate that supply. But when oil prices dropped, investors thought Graham’s business would drop. It has, but not as much as expected.

Now that oil prices have found some stability in the $50 range as expectations for economic recovery have improved, it appears that refiners may start investing again. And that’s great news for Graham. 

(If you want another stock like Graham, check out SXC Health Solutions (Nasdaq:SXCI). I’ve discussed it here in Daily Profit before. It’s not oil services, obviously, but it’s got all the characteristics of a winning investment.)

*****Higher oil prices will also be good for perhaps the most beaten down sector in the stock market after financials – alternative energy. I haven’t talked much about alternative energy here for the last, well, six months at least. That’s because there hasn’t been much to say. At least, not much good.

Cheap oil is not good for alternative energy. Wind and solar power are too expensive to compete with oil at $40 a barrel. But now that oil prices have found a floor, alternative energy stocks have started showing signs of life.

I haven’t recommended any in SmallCapInvestor PRO yet, but I’m warming up to the idea. In fact, I already know which alternative energy stock will be the first to make the SmallCapInvestor PRO portfolio. It’s a solar energy company that does a lot of business in China.

That’s good, because alternative energy (like solar) in China doesn’t necessarily depend on market demand. China’s government is very motivated by its pollution problems to invest in clean energy. And the solar stock I’m watching just won a government contract to supply 1.6 Mw of solar power to 80,000 homes in China.

While I’m waiting for the right conditions to recommend this stock, you can get prepared for it with my SmallCapInvestor PRO Special Report titled Alternative Energy Investing 2009: 3 Top Stocks Set for Profits. Here’s a LINK where you can get more details.

*****Alcoa (NYSE:AA) reports after the bell today. The stock, and the overall market, are down ahead of the start of earnings season. And that’s actually a good thing.

Investors are taking some gains ahead of earnings and that means they are concerned the earnings and, more importantly, forward guidance will not be good. The last thing I’d like to see right now is high expectations for this earnings season. That would be a set up for a big drop.

As it is now, there’s actually room for some upside surprises. Not that I’m saying there will be. But at least there’s room for it. When stocks are extremely overbought, news has to be fantastic for them to move higher. 

*****For some reason, I deleted my request for your comments, questions and jokes at the end of each Daily Profit. Now I find myself left out of your conversation. And I haven’t had a limerick from our resident poet John in over a month. I’ve been meaning to get my email address back in here, but sometimes my mental circuitry gets overloaded and I forget. So anyway, please send your questions, comments or jokes to editorial@247investor.com.

That’s it for today. I’ll talk to you tomorrow.

 

Ian Wyatt

Editor

Daily Profit





Posted 04-07-2009 11:58 AM by Ian Wyatt