Bargain Double Header: New Pick Devon Energy and Pre-Earnings Review of Green Brick

Last week’s rally in stocks may not be the final bottom for the current bear market. But as I recently wrote, history suggests, we may be getting closer.

Therefore, I continue to position the PCA portfolio in a way that will most likely benefit from the return of the bull market. Moreover, I am focused on three macro themes:

  • The reversal of globalization – Reshoring;
  • The migration from high tax, high regulation states to the sunbelt; and
  • The ongoing changes in the energy sector.

Today’s update offers a new pick, in the energy sector, as well as a review of an existing holding in the homebuilder sector. Aside from being stocks which are likely to benefit from the current macro themes, as I discuss below, both are dirt cheap bargains based on their price-to-earnings (P/E) ratios.

Buy Devon Energy

I am recommending purchasing shares of oil and gas exploration and production company Devon Energy (NYSE: DVN) as it flirts with a major long-term breakout.

The energy sector is booming as money starts to move away from the green energy market. One of the beneficiaries has been Oklahoma City-based Devon Energy, whose management team has been steadily expanding the scope of the company’s business to adapt to the changing landscape.

Oil and natural gas aren’t going anywhere as central energy sources, at least not for a while. That’s why Devon’s recent Eagle Ford property acquisition of 42,000 acres adjacent to an existing property in the central Texas shale between Houston and Dallas is a significant move, because it adds to the company’s reserves.

Moreover, the geographic character of the buy puts it smack in the middle of Houston and Dallas, which are rapidly growing areas of the country with rising energy needs.

The addition of both oil and natural gas deposits fits in quite well with Devon’s recent announced partnership with privately held liquified natural gas (LNG) company Delfin Midstream to develop a Gulf of Mexico LNG hub.

Booming Metrics

Devon is scheduled to release its current earnings report on November 2. The stock trades at a bargain (seven times earnings), and sports the revenue and earnings metrics that are usually associated with technology stocks when they are in their sweet spot.

Devon generates $20 billion in sales and delivered 157% earnings and 68% year-over-year sales to go along with 120% revenue growth in its past quarter. Moreover, the company has beaten expectations in five of the last quarters.

Expectations are for $2.13 per share in earnings, with whisper numbers as high as $2.42.

Price Chart Analysis

Devon has gained quite a bit since bottoming out in July 2022. But the stock has the potential to move significantly higher based on the long-term dynamics of the global energy market.

Specifically, if the stock can take out the $75 area, it should have enough momentum to move toward $100 over the next few weeks to months.

The Accumulation Distribution Indicator (ADI) is bullish. When ADI rises it means short sellers aren’t active. On Balance Volume (OBV) is neutral, which is not a negative as long as ADI is rising.

Bottom Line

I am betting on a momentum boost on Devon, which I expect will happen on an earnings beat.

I own a position in DVN as of this writing.

Green Brick: Long-Term Bet on DFW Metroplex Growth

Sometimes Wall Street gets it way wrong. This seems to be one of those times.

Shares of Green Brick Partners (NSDQ: GBRK) have fallen steadily of late due to the rise in interest rates, not because the company isn’t executing a well thought out business plan. Management is striking a cautionary note in the company’s upcoming earnings release, due out 11/2/2022. However, I’ll be holding on to my shares and may consider adding to my current position.

Why so Bullish?

I have two reasons to be bullish on GRBK and the homebuilder sector. Familiar readers of my post know about the ongoing building boom in my neck of the woods, the Dallas/Fort Worth (DFW) metroplex. This is largely due to out-of-state people flocking to the area to escape high taxes and low job prospects in other areas of the country.

It so happens that Green Brick, which is based in Plano, Texas, in the heart of DF, does all its business in the sunbelt. Moreover, the company is increasing its footprint in DFW.

Specifically, Green Brick is building in areas where the expansion is just picking up steam, which constitute the farthest reaches of the undeveloped portions of DFW. An example is the 1,400 acre, 1,800 home property it is developing along with Meritage Homes (NYSE: MTH) in a small town to the Northeast of Dallas, a place called Farmersville. The town is known for its farmers market and its annual homage to highly decorated war hero Audie Murphy.

What makes this area so interesting? For one thing, it has lots of land. For another, once the highway 380 expansion gets underway in 2023, the area will have a direct connection to jobs-rich Frisco and Plano. Highway 380 also empties into highway 75, which leads to the new Texas Instruments (NSDQ: TXN) plant which will soon be partially operational in Sherman, Texas.

In addition, Farmersville has plans to build a large commercial development around the recently merged Kansas City Southern Railroad, which already has a major presence in the town.

Moreover, Green Brick is building starter homes in this development, which will be priced at $250,000 or less, making this development affordable, especially to the workers that will be attracted to the area, given the development plans that are in place.

Price Chart Analysis and Earnings Preview

GRBK shares have been under pressure of late, partially from short sellers (ADI has rolled over) and partially from panicked buyers which have turned into sellers (shaky OBV).

The stock lost support at $23 back in September, and failed near the same price point recently. It is very oversold, however, as the Relative Strength Index (RSI) nears the 30 area.

On the earnings side, GRBK has beaten expectations in four of the last five quarters and I expect a decent report for this go-round. The bigger concern is the revenue and forward guidance. So far, most homebuilders have given cautious guidance while simultaneously delivering better-than-expected earnings and somewhat soft revenue.

Last quarter featured 57% year-over-year earnings growth with 20% sales growth. Moreover, the stock is selling at a P/E ratio of just below 4, with a price-to-book ratio of one.

What’s My Point?

In my opinion, the current price action in shares of GRBK do not reflect the company’s future potential. In fact, as far as I can tell, management is firing on all cylinders and making all the right decisions.

Earnings may come in soft. But any type of beat, especially when combined with better-than-expected guidance, will likely boost shares.

In the end, real estate is all about location, location, location. And Green Brick is in the right spot at the right time. I’m staying patient.

At some point Wall Street will figure it out.

I own shares in GBRK as of this writing.

Stock Talk

Add New Comments

You must be logged in to post to Stock Talk