Guy Gottfried’s Undervalued Energy Pick


Guy Gottfried is a Canadian value investor, he has spoken at most of the Value Investing Congresses I’ve attended and he has often shared valuable ideas — usually stocks I’ve never heard of. A couple years ago it was The Brick (BRK in Toronto), which has done extraordinarily well, and last Fall it was ClubLink (CLK in Toronto), the oddball golf course and tourist railway company which spiked on his attention but has also moved consistently up from that point (that made it in as an Idea of the Month for us, still a nice dividend payer — unfortunately, the other pick he presented was a far better performer in the short term). I’ve never owned either of those personally, but they’ve certainly done well.

His average gain is about 70% (annualized), which is much better than his fund’s (still good) 28% performance. And he made some excellent points about why the stocks he’s spoken about have done so well — the underlying reason, he thinks, is that he insists on much higher margin of safety and degree of confidence in order to speak about it publicly. So, he suggests, why don’t we all invest only in stocks that we’d feel comfortable recommending to the world and publicly attaching to your name? Good point.

So what’s his idea this time? He is, as you will expect, looking for cheap stocks even though he thinks the market is expensive. This time, he’s moving up to a larger company.

WPX Energy (WPX in the US) is his stock, an oil and gas company — this is a $3.4 billion market cap company that was spun off at a bad time. WPX is the former exploration and production division of the Williams Companies (WMB), and it’s weighted toward natural gas (81% gas, 10% NGLs, only 9% oil).

Why? Well, of course he says it’s cheap.

He says the 2012 disposition of some of their non-core assets would imply a price 70-100% higher. Other transactions imply upside of over 100% using his valuation metrics.

It trades at 8X free cash flow with natural gas at $4, and it has real growth prospects. He thinks gas at $4 is closer to undervalued than overvalued, though obviously the gas price will be critical.

Trades at 2/3 of tangible equity — it’s rare for an E&P company to trade at a discount to ...

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