Don’t be a HERO on Iran Deal

In yesterday’s Goldman Guide we discussed three ways the Federal Government may ruin this great bull market we are currently enjoying.

One of these was the pending Iran nuclear deal that was announced yesterday. Trusting oppressive regimes has never paid off in the past and probably will not here.

Yesterday all of the market networks had the talking heads giving advice on how to ‘trade the Iran deal’. Some of the bulls were acting as if loosening the economic restrictions on Iran will create a new China with an opportunity for double digit growth, which is ridiculous. Make sure not to get into the herd mentality here, as there is still a long way to go until the Iran economy represents a great opportunity for investors.

One of the expressed long term goals of the Obama administration related to the deal is to further decrease our dependence on foreign oil. Maybe someone should tell the President to call off the attack dogs of the EPA when it comes to natural gas and approve the Keystone XL pipeline, but we digress. Everyone might be jumping on U.S. oil and gas stocks in the short term. Treat this sector like any other and keep the big picture in mind while using the same parameters when picking other stocks.

Speaking of our oil picks, back in July we highlighted Hercules Offshore, Inc. (NASDAQ – HERO - $6.35) which is currently in the red, down close to 16% since then. The stock has been a roller coaster since then, basically following the price of oil. The technical analysis does not paint a good picture, giving a very bearish signal all the way out to the 50 day DMA. Additionally, HERO has dropped over 18% on very heavy volume averaging 2.5 million shares traded per day over the last three months. On the bright side, the Company is forecast to bring in over $1.1 billion in revenue for 2014 putting the forward P/E at a very attractive 8.5. We think a longer term approach here may be in line for HERO, despite the sell-off yesterday. The stock may get back up to the $8 level in early 2014.

Additionally, if you are on the lookout for a long term inexpensive oil play, look to the up and coming Bakken as an alternative to drilling and offshore plays that even some environmentalists are supporting. Some experts estimate that there are 24 billion barrels of oil in the Bakken corridor of Montana, North Dakota, South Dakota, Saskatchewan, and Manitoba.  Double Eagle Petroleum Company (NASDAQ – DBLE - $2.18) is a solid, undervalued longer term play for a foray into this market and traditional oil and gas. With expected revenue increase of 18% to $52 million in 2014 the forward 12-month P/E is under 2! The Company has had two straight quarters in the black related to EPS and if the trend continues the stock could triple sometime in 2Q14.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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