After a decade of disappointment for energy stocks, it is not surprising that when oil’s collapse really accelerated back in early March, anything even vaguely related to oil got hammered. When a sector sells off like that though, there are usually a few stocks that, when you look back after the dust has settled, just shouldn’t logically have gone with everything else.
A good example would be DMC Global Inc. (BOOM).
The Story
For starters, not all of their business is directly connected to energy. DMC is the parent of two separate companies, DynaEnergetics and NobelClad. The first is the energy connection, and more on that in a minute. The second, NobelClad is one of the world’s leaders in explosion welding and cladding. They basically use explosive power to weld together different metals and create vessels and parts that can be used in extreme conditions, such as under enormous pressure and at extremes of temperature.
NobelClad is the smaller of the two companies, accounting for only 22% of sales in 2019, but there are opportunities there for growth. For example, they make blast shields for rocket pads, which with the recent successful launches by private companies looks like being a growth area. Some of their business is also energy-related, but more in the areas of power generation and transmission, so NobelClad does provide some valuable diversification.
As the world recovers from the economic shock from the pandemic, that side of BOOM’s business…
After a decade of disappointment for energy stocks, it is not surprising that when oil’s collapse really accelerated back in early March, anything even vaguely related to oil got hammered. When a sector sells off like that though, there are usually a few stocks that, when you look back after the dust has settled, just shouldn’t logically have gone with everything else.
A good example would be DMC Global Inc. (BOOM).
The Story
For starters, not all of their business is directly connected to energy. DMC is the parent of two separate companies, DynaEnergetics and NobelClad. The first is the energy connection, and more on that in a minute. The second, NobelClad is one of the world’s leaders in explosion welding and cladding. They basically use explosive power to weld together different metals and create vessels and parts that can be used in extreme conditions, such as under enormous pressure and at extremes of temperature.
NobelClad is the smaller of the two companies, accounting for only 22% of sales in 2019, but there are opportunities there for growth. For example, they make blast shields for rocket pads, which with the recent successful launches by private companies looks like being a growth area. Some of their business is also energy-related, but more in the areas of power generation and transmission, so NobelClad does provide some valuable diversification.
As the world recovers from the economic shock from the pandemic, that side of BOOM’s business looks poised for a quick return to previous levels.
That in itself makes the stock look reasonable, but the real value comes from DynaEnergetics, although on the surface, that wouldn’t appear to be the case. Their main products are well perforation systems that are used in fracking. I am sure most of you are aware that that is a troubled industry right now.
The shale boom took the U.S.A. to the top of the list of global oil producers, creating energy security and countless jobs on the way. The problem though was that the average lifting cost for U.S. shale and other unconventionally extracted (i.e. fracked) oil has come down over the last couple of years but is still estimated to be over $40 per barrel. After a quarter when WTI average around half that, there have been big cuts in capex.
You would think that would hurt DMC, and Q1 2020 sales were indeed a lot lower than the same quarter last year. However, that misses two important things. First, the main focus for E&P companies from here is going to be the efficiency of their remaining wells, and that is what DMC’s perforation systems are about. Second, DynaEnergetics is positioned to make money off well closures too as they make a plug and abandonment system.
The deeper you look into what the company actually does, the more BOOM’s collapse looks overdone.
The Setup
That collapse has been pretty spectacular.
At the low in March, BOOM was down around 70% from the 52-week high of 66.76 reached in July last year. There has since been some recovery, and the upward channel (orange trend lines) and multiple support levels that have been formed during that gradual, uneven bounce give the chart a very bullish look.
This week’s bounce off of the support at $26 (white line) sets up for a trade using that level as the basis for a stop. As stop at around $25.40 would, based on Thursday’s close of $27.54, give a downside to the trade of under 8%, while the upside, if BOOM moves up to test the June 8th high of just above $37, would be well over 30%.
Conclusions
At first glance, as a supplier to the troubled fracking industry, the big drop in BOOM looks justified. Dig a little deeper, however, and that isn’t really the case. They have some diversification, can actually benefit to some extent from well closures, and the efficiencies their main product delivers for drillers is likely to be in demand as wells gradually reopen.
All in all, when you throw in a bullish technical picture and a tempting risk/reward profile at these levels, BOOM looks likely to explode upward soon, if you’ll forgive the terrible pun!
