In the Danger Zone this week is Cabot Oil & Gas (COG). This stock is also on my Most Dangerous Stocks list and gets my 'Very Dangerous' rating. It makes that list because (1) the company reports positive and rising GAAP earnings while economic earnings are negative and declining and (2) the valuation is sky high.
COG’s GAAP earnings move in the opposite direction of their economic earnings because of balance sheet issues:
- $857mm in net deferred tax liabilities
- $17 million in off-balance sheet debt and
- $313 million in accumulate asset write-downs. The $313 million in asset-write-downs is a indicator of management’s inability to create shareholder value. It means that for every dollar of capital in the business management has destroyed about 10 cents. Despite what the accounting results show, this company is not making money.
However, the stock market’s valuation of the stock completely overlooks this point. At ~$50/share, the valuation of COG implies the company will grow is NOPAT at nearly 20% compounded annually for twenty years. Those are some lofty expectations. Too high and too much risk for me especially when my model shows the company is destroying value.
Note that there are several energy stocks that I like and own including Exxon (XOM), Chevron (CVX) and Holly Frontier (HFC) -- which are more into refining than exploration and production like COG.
Disclosure: I own XOM, CVX and HFC. I receive no compensation to write about any specific stock or theme.