June/July Idea of the Month

By Travis Johnson, Stock Gumshoe, June 27, 2014

This month I want to take a look at a stock I’ve mentioned in the past, but have not yet personally bought.

But first, I thought I’d call your attention to another wave of negativity that could be hitting Seadrill (SDRL) shares — Elliot Gue, who was one of the first newsletter folks to call attention to this stock several years ago, recommended that people sell Seadrill (he says he made that sell call last Fall, don’t know if that’s true, but he’s lately been touting under a “sell this in order to buy my next great pick” spiel). On the flip side, Gue’s former employer/newsletter Personal Finance is just out with a new ad teasing what is clearly Seadrill as their July 2014 “stock of the month,” so you can check out both of those assessments if you’re trying to make up your mind what to do with the shares.

And beyond that, another analyst chimed in with a sell on SDRL this week as they pile on (there have been several analyst downgrades this year) — Danske downgraded it to a sell as well, and other articles (like this one from the Motley Fool) have called attention to the weakness in the deepwater rig market. All of that negativity is very much understandable given the very public and well-followed cuts to exploration budgets at the big oil companies — the company’s public stance has been that they can manage through this slowdown in demand over the next year or two and that they see another uptick in demand for rigs in 2016.

I have no idea whether or not that’s true — Seadrill is now really a speculative income stock, they’re not likely to bump the dividend up markedly in the next year or two (though they surprisingly raised it in the last quarter), so I’m continuing to hold because I think it’s likely that management can keep the dividend flowing at roughly this level, and the stock deserves to trade at a 10% yield or so in this environment so it should be relatively flat around this price. That said, going beyond the current weakness in investment by big energy companies would hurt, as would a falling oil price, and I wouldn’t be urging anyone to buy it up near $40 here. Still just a hold for me, though I’m reinvesting my dividends, and we’ll see how ...

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