Success in stock trading and investing depends a lot on identifying opportunities, some of which are clearly visible while others need to be identified. There could be a potential goldmine that's available for a remarkably cheap price.

Sometimes, even when a stock's metrics are all favorable, it just isn't valued high enough. It certainly defies logic and it's one of those instances when the stock market gets it wrong. But that's where you have a great opportunity presented to you.

There are some attractively cheap bargain stocks out there, as pointed out by analyst Matthew DiLallo of Motley Fool. He points out two natural gas companies - one is Kinder Morgan ($KMI) and the other Antero Resources ($AR). Both sell at bedrock bargains when compared to their competitors. It's strange, considering that their efficient operations should bestow them with a premium valuation. Their bargain prices make them stocks with great value, and DiLallo reckons they should be bought right now.

Unbelievably Low Valuation for Kinder Morgan

$KMI stock has plunged by a massive 60% during the past three years despite its distributable cash flow (DCF) sinking only around 7% from the peak. The company is looking to compensate for that, and its shares trade at merely 8.3 times DCF. By contrast, its competitors sell for 12.1 times DCF average!

Kinder Morgan provides 36%dividend growth annually all through 2020 with 2.6 times dividend coverage this year. By these metrics, the company should get a premium valuation. Rival company Targa Resources ($TRGP) gets higher valuation despite having weaker metrics. Kinder Morgan generates cash flow that's more than enough for financing its expansion plans and dividend. That had enabled the company to buy back $250 million-worth of its stock last year. In 2018 it could also repurchase a further $500 million.

Antero Resources Plans Steps to Secure Premium Valuation

Antero Resources ($AR) has experienced a significant slump recently. As a result, its stock is down by more than 50%. That gives it a massive discount in the exploration and production (E&P) sector. There are 51 E&Ps in the United States that are publicly tradedand, on average, they trade at 6.1 times their EV (enterprise value) to earnings before EBITDAX (exploration expenses, depreciation, interest, amortization and taxes). By contrast, Antero trades for only 4.6 times EV/EBITDAX.

That's hard to explain when you consider that Antero has financial metrics that put it closer to the range of top level E&Ps such as Cabot Oil & Gas ($COG), trading at a massive 9.8 times EV/EBITDAX. DiLallo points out the characteristics shared by these top tier E&Ps:

  • Running large-scale operations having over $10 billion enterprise value
  • Experiencing production growth by at least 15% per year
  • Having leverage ratios below 2.0 times EBITDAX debt
  • Generating free cash flow

With the exception of the leverage ratio, which it plans to set right next year, Antero meets the rest of these metrics. So Antero should be trading at the level of these elite E&Ps and not below the average E&P level. The company is therefore thinking of ways to bringing the gap down, as this Motley Fool article, also by DiLallo, describes. Among the options considered are buying back stock and initiating dividend to return cash to investors. Antero looks at the example set by Cabot which gave a 150% boost to its dividend last May and then repurchased shares. This year it increased its dividend by another 20%. Cabot outperformed Antero significantly last year.

Why Grabbing and Waiting Could Be a Winning Strategy

In any case, it is important to wait and watch for Kinder Morgan and Antero.DiLallo points out that you wouldn't often find premium companies being available for such bargain valuations. And steps such as repurchasing their respective cheapstocks are seriously considered by these companies. It will take time, but these measures can reduce the gap these companies have to their rivals and raise their share value. So if you're patient enough you can attain significant gains in the future. Not only could they close the gap to their peers' averages, but they could also head towards premium valuation territory.

Stock trading is an innate talent for some, while others work at it and succeed through experience. The first steps involve free stock trading with an online broker dealer. TradeZero offers you all the resources you need to get started. Call us at +1 954-944-3885 or email support@tradezero.co.

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