The big money when investing is when you can pick the beaten down stocks that will come back in a few years and net you a hefty profit. The great Peter Lynch called these “triplebaggers” as you triple your initial investment. One beaten down stock to look into is Cenovus Energy (NYSE: CVE).
There are many factors that have caused the stock price to plummet to its current sub $10 stock price, many of which I will get into later in this post. But the company has some things going for it and if it can put it all together, you should be handsomely rewarded with a much higher stock price in the coming years.
Let’s dig into Cenovus Energy and see what the company is all about.
Who Is Cenovus Energy?
Cenovus Energy is an oil and gas producer that focuses on extracting oil from the tar sands in Canada. They came to being in 2009 when Encana Corporation split into two companies.
For the eight years Cenovus has been in business, it has been a rocky road. Oil prices boomed and then crashed, causing issues with most oil stocks.
The company is regarded as one of the best, if not the best player in the industry and they have the best technology for extracting oil from the tar sands than any other company.
When the company reported earnings per share in April, they hit estimates of a loss of $0.05. But they are expecting earnings to grow by 203% for full year 2017 and by 28% in 2018.
This growth is coming off the heels of some bad earnings reports back in 2016 when oil prices dropped, causing the company to slow their growth.
What Does The Future Hold?
The future looks bright for Cenovus Energy. Earlier this year, the company bought 50% of the tar sands assets of ConocoPhillips for $13.3 billion and will be issuing 208 million new shares to ConocoPhillips later this year.
But as great as this deal is, it is what it causing the stock price to remain low. Analysts and investors are nervous about the large debt the company took on to make this deal.
The additional shares coming to market is also hindering the growth of the stock price. In fact, the stock is down 40% in 2017 alone.
While a new debt load and issuing more shares aren’t the best things for a stock price, I feel that investors are too heavily focused on these issues and not the potential that the purchase offers to Cenovus.
Namely, with the company essentially doubling their production with this purchase and as a result, their potential revenues as well.
And seeing that they have the best technology in the industry to extract oil from the tar sands, they should be able to start experiencing this bounty sooner rather than later. In fact, some analysts believe earnings per share could rise from $0.17 in 2017 to $0.45 in 2018.
Another overlooked benefit is that with the addition of the free cash flows, Cenovus Energy could quickly pay down the debt they took on in the deal.
Because of the potential of doubling their revenues and seeing how smart management has been over the past 8 years, I see a bright future for Cenovus and a rising stock price as well.
When a stock is beaten down, it could mean that the company is in bad shape or that investors overacted and pushed the share price down too much. While there are risks to investing in Cenovus, I feel that the company is solid and has a great management team that can weather any storm. Thus the low stock price is due mainly to an overreaction by investors.
Of course, things can still happen. If oil prices drop, it could create issues for the company. But I don’t see oil prices dropping much in the near term and as a result, see Cenovus as worth the risk.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.