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The Double Play - China And Oil (SNP)
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SNP
When investors choose stocks for their long-term portfolio, it may be based on fundamentals of the company, a new technology, or possibly on the long-term technicals. The strategies mentioned all involve a bottom-up analysis that begins with the company, and eventually works its way up to the sector and overall market.
Conversely, a long-term, top-down approach to investing involves analyzing the world markets and industries which have the ability to outperform in the years to come. Two such areas that have high growth potential are China and the oil and gas industry. When one stock combines two major long-term themes, it typically bodes well for investors.
China and Oil
China Petroleum & Chemical Corporation (NYSE:SNP) has been on a tear the last few years. The combination of double-digit growth in China and rising energy prices have both profits and the stock price soaring at SNP. The company is currently the largest listed company in China.
SNP is the largest oil refiner and second largest oil producer in China, as well as the largest petrochemical producer and distributor. With proven reserves of 3.8 billion barrels of oil and 2.9 trillion cubic feet of gas the company is a major player. Add the fact it has the third largest oil refining capacity in the world, and SNP has the ability to take advantage of record oil prices.
Fundamentally Sound
Over the last twelve months the company has earned $7.94 per share, resulting in a price-to-earnings (P/E) ratio of 11.8, which is inline with the industry average. Based on 2007 estimates, SNP is trading at a P/E ratio of 9.6 with earnings expected to come in at $9.72 per share. Even more impressive is Standard & Poor's 2008 estimate for $11.13 of earnings per share - resulting in an 8.4 multiple based on a stock price of $93.44.
What makes the company more attractive is the sales growth numbers that are well above the industry average. Over the last twelve months sales have grown by 30%, over twice that of the S&P 500 and well above the negative number reported by its industry.
Setting Up For a Rally
The July/August sell-off that has affected stock markets around the globe took its toll on SNP, which at one point lost one quarter of its value in five weeks. While this was bad news for investors already in the stock, it was a welcomed pullback for potential buyers. As of August 17 the stock was sitting within a long-term support zone ($85 to $95) and offing potential investors an attractive buying opportunity according to technical analysis conventions. (To learn more, see Support & Resistance Basics.)
A long-term uptrend for the stock combined with the pullback from a high and an extreme oversold condition on the daily chart all scream BUY from a technical perspective. The key to buying in this area would be using a stop-loss order to protect from further downside.
What Could Go Wrong
For starters there is the possibility of the credit crunch spreading and resulting in a global economic slowdown. If this were to happen the price of oil would likely fall as demand dries up. Falling oil prices will have a direct affect on SNP at its top and bottom lines. On the flip side, if the demand for crude products continues to increase it will be a direct driver of profits for SNP.
The other risk associated with SNP is the China factor. If the Chinese stock market forms a bubble and explodes as the U.S. market did in 2000, it will likely spare nobody, including the Chinese energy firms. Investors must realize the risk that is associated with a stock that has a high reward potential.
Conclusion
In my view, the three key factors in picking a winning stock are the fundamental numbers, the technical analysis and the long-term outlook for the sector. All three are bullish in the case of SNP. Therefore, SNP appears to be a no-brainer as a potential buy. Though keep in mind, this is a stock market, and for every share you buy, someone is selling...
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
Conversely, a long-term, top-down approach to investing involves analyzing the world markets and industries which have the ability to outperform in the years to come. Two such areas that have high growth potential are China and the oil and gas industry. When one stock combines two major long-term themes, it typically bodes well for investors.
China and Oil
China Petroleum & Chemical Corporation (NYSE:SNP) has been on a tear the last few years. The combination of double-digit growth in China and rising energy prices have both profits and the stock price soaring at SNP. The company is currently the largest listed company in China.
SNP is the largest oil refiner and second largest oil producer in China, as well as the largest petrochemical producer and distributor. With proven reserves of 3.8 billion barrels of oil and 2.9 trillion cubic feet of gas the company is a major player. Add the fact it has the third largest oil refining capacity in the world, and SNP has the ability to take advantage of record oil prices.
Fundamentally Sound
Over the last twelve months the company has earned $7.94 per share, resulting in a price-to-earnings (P/E) ratio of 11.8, which is inline with the industry average. Based on 2007 estimates, SNP is trading at a P/E ratio of 9.6 with earnings expected to come in at $9.72 per share. Even more impressive is Standard & Poor's 2008 estimate for $11.13 of earnings per share - resulting in an 8.4 multiple based on a stock price of $93.44.
What makes the company more attractive is the sales growth numbers that are well above the industry average. Over the last twelve months sales have grown by 30%, over twice that of the S&P 500 and well above the negative number reported by its industry.
The July/August sell-off that has affected stock markets around the globe took its toll on SNP, which at one point lost one quarter of its value in five weeks. While this was bad news for investors already in the stock, it was a welcomed pullback for potential buyers. As of August 17 the stock was sitting within a long-term support zone ($85 to $95) and offing potential investors an attractive buying opportunity according to technical analysis conventions. (To learn more, see Support & Resistance Basics.)
A long-term uptrend for the stock combined with the pullback from a high and an extreme oversold condition on the daily chart all scream BUY from a technical perspective. The key to buying in this area would be using a stop-loss order to protect from further downside.
What Could Go Wrong
For starters there is the possibility of the credit crunch spreading and resulting in a global economic slowdown. If this were to happen the price of oil would likely fall as demand dries up. Falling oil prices will have a direct affect on SNP at its top and bottom lines. On the flip side, if the demand for crude products continues to increase it will be a direct driver of profits for SNP.
The other risk associated with SNP is the China factor. If the Chinese stock market forms a bubble and explodes as the U.S. market did in 2000, it will likely spare nobody, including the Chinese energy firms. Investors must realize the risk that is associated with a stock that has a high reward potential.
Conclusion
In my view, the three key factors in picking a winning stock are the fundamental numbers, the technical analysis and the long-term outlook for the sector. All three are bullish in the case of SNP. Therefore, SNP appears to be a no-brainer as a potential buy. Though keep in mind, this is a stock market, and for every share you buy, someone is selling...
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
by
Matthew McCall
Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.
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