Stocks breaking out of a negative or declining trend can often lead to sustained rallies. United Rentals, Inc. (NYSE:URI), Kodiak Oil & Gas Corp (NYSE:KOG), and Tesla Motors Inc (NASDAQ:TSLA) are among movers that have given indications of such reversals. However, some may be false alarms.
United Rentals’ Sales Surging
In a matter of two months, United Rentals, Inc. (NYSE:URI) has seen a high of $59 and a low of $46. The company deals in equipment rental business though a network of 824 rental locations in the United States and Canada. Included in its rental products are construction and industrial equipment. The stock has surged lately after the company swung back to profit during the quarter ended June 30. United Rentals said its profits stood at $ 83 million during the latest period, compared to a loss of $52 million in the same period last year. Revenue jumped to $1.21 billion, a solid 22 percent improvement.
Third Point's Dan Loeb discusses their new positions in a letter to investor reviewed by ValueWalk. Stay tuned for more coverage. Loeb notes some new purchases as follows: Third Point’s investment in Grab is an excellent example of our ability to “lifecycle invest” by being a thought and financial partner from growth capital stages to Read More
A recovery in housing and construction sectors is playing a crucial role in the company’s surging sales. Given the trend towards leasing rather than owning equipment, analysts at Oppenheimer are upbeat about the prospects for United Rentals, Inc. (NYSE:URI) and have put an Outperform rating on the stock with a target price of $68. This, compared to its current price of $55.7 and forward price earnings ratio of 8.5 and price by sales ratio of 1.04, indicates the stock has the potential of making further advances.
Kodiak Oil & Gas Out of Volatility
Colorado based Kodiak Oil & Gas Corp (NYSE:KOG) is an independent oil and gas company. This stock has been subject to extreme volatility in recent months the latest being last week when it tanked 7.5 percent. With a majority of operations based in the prolific Bakken formation, the company has been growing at an amazing rate in recent years. While sales and profits continue to move up, its margins have come under pressure lately. In the latest quarter, its profits grew multi-fold to $19.4 million but margins dropped to 11.8 percent, down materially from 32 percent in the same quarter last year.
This obviously caused a fair amount of heartburn among some investors who decided to dump the shares. However, the stock has jumped back after it was upgraded to Buy by analysts at SunTrust. Fundamentals warrant positive analysts’ expectations. Strong earnings visibility, even though at lower margins, is a factor which is clearly visible in a forward earnings ratio of just 8.6.
Tesla’s Flying Electric Car Stock
A look at the stock chart for Tesla Motors Inc (NASDAQ:TSLA) reveals the stock has been on steroids lately. From levels of $53 in early May, it has seen a spectacular and gravity defying rally to three digits. Not to forget, this company is involved into production of expensive electric cars which most car buyers cannot afford. In capital and labor intensive businesses such as automobile production, poor judgments can cost dearly. Against this background, it was clear that the stock was flying beyond what fundamentals warranted. It took a Goldman Sachs Group, Inc. (NYSE:GS) report to highlight the perils.
This led to a brief correction but the stock has again started moving up. While the stock is popular among traders, it is almost impossible to connect it to fundamentals. The company has barely achieved breakeven level and trades at a forward price earnings ratio of a whopping 126.5. Unlike information technology companies, scalability in this business comes at a very high cost and for a company that already has a debt equity level of 2.7, it may not be a very positive thing to talk about.
Out of the three stocks, Kodiak Oil & Gas Corp (NYSE:KOG) seema to represent a favorable risk/reward scenario for investors—something that is dampened by a highly leveraged balance sheet in the case of United Rentals, Inc. (NYSE:URI). As far as Tesla Motors Inc (NASDAQ:TSLA), there has been a complete decoupling between price and fundamentals. Considering this, it may continue to gain, but investors can save themselves from a potential steep correction by avoiding this.