not all 52-week lows are created equal

In theory, Wall Street analysts are paid to predict the future earnings of the companies they cover and use those predictions as the basis for their stock recommendations. In reality, this is not always how the game works. Often, analysts seem to forget that earnings and earnings growth have always been the mother’s milk of stock prices over the long term. Instead, they focus on short term price fluctuations, lowering ratings when a company’s stock drops, even as its earnings estimates rise.

Make no mistake, as I’ve repeatedly warned, most stocks making the 52-week low list are there for good reason. The large majority of them are heading lower, and many will cease to exist. Conversely, most stocks making 52-week highs are likely headed higher. However, profitable exceptions to these rules do exist. With a little digging, investors can exploit the imbalance between the Street’s short-term perception of a company, as reflected in its stock price, and its long-term prospects, as reflected by its earnings outlook.

I recently invested in an energy service company, USA Compression Partners (USAC) following this logic. USAC owns and operates a fleet of 2,700 compressor units with 1.7 million total horsepower. Its customers are gas producers in the prolific Utica, Marcellus, and Permian basins. The units are leased a year at a time.

I initially interviewed USAC’s management at the company’s Austin headquarters in June 2014. The stock was $25 then, up from its $18 initial public offering in 2013. Amazingly, despite the fact that US gas production has increased annually for years (and is highly likely to continue growing) and the fact that US Compression beat both 2014 and 2015 revenue and earnings estimates, its stock hit a 52-week low of $7/share earlier this year. It was an $8 stock when I returned to Austin and visited with the company’s management again in February. It’s now above $14 and I expect it to head higher.

The stock sold off primarily because of several concerns that turned out to be overblown, if not out-and-out wrong. First, the drop in natural gas prices spooked Street analysts. As gas prices and especially oil prices plummeted, they worried that USAC customers might curtail gas production or request price reductions for these compressor units. That has not occurred. Analysts also worried that USAC might reduce its hefty 52-cent quarterly cash distribution. That also has not occurred. Instead, USAC announced a waiver covenant last month. The company has $729M of debt, vs. $154M in 2015 ebitda. At that distribution level, USAC holders will receive over 20 percent annually.

Two years ago, when I first visited its management, USAC was undoubtedly an expensive stock at $25. Despite price target cuts by several analysts, its healthy earnings made it a dirt-cheap stock at $8 when I returned in February of this year. When (or if) oil and gas prices recover, USAC could easily rally past $20 again. While half of the analysts following USAC are neutral, I suspect some will change course and recommend the stock if confidence returns to the energy sector. In other words, the same short-term focus on price fluctuations that hammered the company on the way down could wind up lifting it even more as it rises.

2 thoughts on “not all 52-week lows are created equal


    Scott, you are the BEST. Your way of explaining things is remarkable. Thank you very much and please continue to post your thoughts. All the very best, Scott. Cheers, Carlos.

  2. Louis Stouch

    Hi Scott. Nice idea. 14% dy at 14, and the move above the 200 day.
    Afraid I don’t understand the debt covenant waiver comment. I assume you mean they can continue paying the dividend even if EBITDA drops below a certain point? Only other point of concern would be if they borrowed money to pay the dividend. Given I’ve read your book, I would assume this is not the case:)
    Thanks for the idea.


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