My trading background and experience means that, in general, when I am looking for recommendations and interesting stock picks in the energy sector I am focused on value. Undervalued stocks represent the best opportunity for a relatively fast profit. Growth potential, on the other hand, can take time to play out. That said though, every portfolio should contain some long term investments in companies positioned for growth.
In the past few months, as the energy sector as a whole has caught up with the broader market in terms of valuation, finding cheap stocks has become increasingly difficult. It is not that there isn’t value in the sector; it’s just that individual opportunities that scream value have become increasingly rare. My attention, therefore, has turned more towards companies that have long term growth potential, such as Murphy USA (MUSA).
If you aren’t aware, Murphy USA is a retailing and refining business that was spun off from Murphy Oil last year. The bulk of their business comes from the agreement to provide gas stations and convenience stores at or close to Wal-Mart locations in the US. They currently operate over 1100 stores in 23 states and reported EPS of $0.21 on revenues of over $4 Billion last quarter. Based on consensus expectations for the next year’s profits the stock currently trades at a forward P/E of around 17.5. This isn’t cheap, but nor is it excessive; MUSA looks fairly valued. They do, however, have potential for long term growth.
This potential comes from their association with Wal-Mart. The retail giant has recently announced a shift to focus on smaller stores, but still has plans to open over 100 new supercenters this year. That and the fact that Murphy locations are in only 23 states would suggest that the company can be expected to show significant growth in the coming years. Apart from the obvious potential of new stores there is one other important benefit from being a Wal-Mart partner.
Wal-Mart’s success has been based on their ability to effectively manage supply and logistics. It is this that has made them the largest retailer in the world and the lessons that Murphy USA can learn from their partner will enable them to effectively ride the coat tails of that success. Low cost, high volume gas retail can be a successful model, but obviously cost control is of paramount importance. That is what Wal-Mart specializes in. There are many who dislike Wal-Mart’s practices for varied reasons such as their low wage structure or the fact that they effectively destroy small businesses but it is hard to argue with their success. If they bring that success to gas retail and convenience stores it is hard to see anything but a bright future for Murphy.
As I said, this is more of a long term growth opportunity than anything, but that doesn’t mean that price and some technical factors shouldn’t be considered. It just so happens that current price action leaves MUSA in a place where the kind of risk controlled trade that I look for can be made.
The above chart shows a key level at around $47 as marked by the gold horizontal line. That level offered resistance at the end of last year and support on two more recent occasions. Logic dictates that it will offer support again and a stop loss just below that level, at say $46.50, would limit potential losses to around 3.5%. Now this may appear to be very close for a stop given the long term nature of the idea and it is, but a clean break of the level would clear the way for a drop to the next logical support around $40. If that was achieved then I would look again at the potential.
As for the upside to the trade, who knows how far it can go. As long as Wal-Mart stays happy with the partnership, Murphy USA can continue to grow rapidly. Even in a long term, growth oriented trade such as this risk/reward matters, and the opportunity to invest in a company with good long term prospects while limiting potential losses to under 5% looks too good to miss.