Welcome to Stock of the Week. This week, we’re looking at a cheap energy play that’s poised for another surge higher.

Since the COVID-19 pandemic began, the stock has been on a tear. But in just the past few months, it has taken a breather.

The company is focused on maintaining a strong balance sheet and solid debt metrics.

It meets all my proprietary metrics for growth, value and income… and is cash-rich and hugely undervalued.

Shares are cheap right now… and big growth is in the forecast.

Get all the details in this week’s episode of Stock of the Week. Click on the image below to watch it.

Transcript

Welcome to another Stock of the Week. And as ever, I’ve got an exciting one.

The last one for August is PDC Energy (PDCE). You might say, “What? Energy? Yet again?” But there’s still a lot to ride on energy.

PDC Energy is an independent exploration and production company focused on the responsible development (they all say that, don’t they?) of natural resources in some of the most prolific oil and gas regions in the U.S. – specifically the core of the Wattenberg Field in Colorado and the Delaware Basin in West Texas.

Energy, yes. Natural resources, yes. Oil and gas, yes. All these things raise our interest. This company’s focused on maintaining a strong balance sheet and solid debt metrics while delivering value-added organic growth from a liquids-rich portfolio in horizontal drilling.

Now, that information I can take from their website, of course. What I really want to know requires drilling down into the numbers.

And as many of you know, this is a taste of the research my team and I provide in GVI Investor. It gives you an insight into how we pick stocks.

So what have we got when we look at the numbers?

We have a company with a Growth-Value-Income rating of 8. That’s my GVI rating, where I’m looking at the P/E ratio (a measure of valuation), the share price relative to profitability, revenue growth or sales growth, dividend yields and momentum. By the way, that’s out of 10. Anything which is 7, 8 or 9, I treat equally.

CROCI, or cash return on capital invested, is 21.2%. Now, you know when I look at CROCI, what I’m looking at is a measure devised by Deutsche Bank and used by Goldman Sachs for their wealthiest clients.

They worked out that those companies which were in the top quartile, the top 25% by CROCI, when they’re held for 12 months and then a new basket of stocks in the top quartile of CROCI is held for the next 12 months, and so on… you get a long-term average of about 30% per annum. Not every year, not guaranteed, and not every stock, but as a basket.

PDC’s stock price did well last year… and is doing well this year… after several years of not really doing that great.

So all that is ticking a lot of boxes.

Let’s dig even deeper. Operating cash flow has been going up. Total borrowing dipped slightly, which is good. Turnover has been going up. You’ve got a company which has got return on capital employed of 29%. That’s good. They’re good, they’re efficient. Return on equity is 28%. These are all good numbers.

Turnover is forecast to grow 39%. Sales are expected to grow given the price of oil and gas.

Earnings are forecast to grow 72%. But you might think… isn’t that all factored into the price?

Well, I’ll get to the price chart in a second… but the forecast P/E ratio – in other words, the forecast profitability of the company relative to its current share price – is a multiple of 3.8. The current share price is cheap because those multiples should be higher. The share price should be many more multiples of its forecast profitability. So it’s undervalued.

That number caught my eye, amongst a bunch of others you can see there as well, but those are the key ones I wanted to draw your attention to.

Total assets have been increasing as well.

So let’s talk about the stock price. Since the COVID-19 pandemic began, it’s been ripping upward. For the last couple of months, it’s calmed down a bit. You might even say from April till now it’s been flat. I think it’s ready for another spike up. I think people were thinking, “Oh, all these oil companies and energy companies, they’ve risen so much, it’s time to take some profits. It won’t last.”

Well, actually, what we’re finding is that after that breather we’ll probably get a second wind and a continuation of the trend, which has already been in place.

So that’s my Stock of the Week, with some of the background and the history and theory behind how we pick stocks. I hope you enjoyed it.

Thank you very much.