WASHINGTON, May 23, 2017 – As we’ve stated numerous times in this column since the beginning of the month, we remain in a cautious “Sell in May and Go Away” stance with regard to stocks and bonds.
Whether it’s currently in pause-mode or has already breathed its last, the recent and totally unexpected Trump Rally was exciting and profitable for most investors who were totally or at least partially invested in stocks in the run-up to Election 2016.
Now, as is almost always true of impressive stock market rallies, we’re in pause mode, awaiting further indication as to whether the Trump Rally will resume, whether it’s over, or whether the gloomy market bears are actually right about market “bubbles” this time around.
On the other hand, shopping for stocks is a lot like buying clothes or shopping for a house. If the situation appears iffy at the moment, either due to price issues, budgets or both, you can hold off buying anything while continuing your research efforts so you’re ready to jump when the stars align in your favor.
For that reason, we’re currently looking at a group of under-appreciated and virtually unknown stocks for potential purchase when the time is right.
Our recent background research has focused, believe it or not, on water and sand. But not just any water and sand. While we encounter both resources on a regular basis – water from our taps and sand on the beaches where our summer plans will take us – we’re talking about the water and sand that are prime ingredients in the Wonderful World of Fracking.
To grossly oversimplify: We’ve long been highly irritated at the environmental freakezoids who suffer major strokes every time the term “fracking” is mentioned. Among other objections, the main arguments these 21st century Luddites typically put forth is how all those deadly chemicals in fracking fluid are going to kill us off in short order.
Objectively speaking, such arguments are so much nonsense. While each drilling company has its own secret fracking fluid formula, chemical additives at most comprise 3 percent of fracking fluid on average. The rest of fracking fluid is simply a combination of water and sand. That’s all.
But actually, it is just a little more complicated than that. The water that’s used in fracking is pretty much non-specific in origin, although we’ll touch upon this later. But the sand that’s used in the process consists of one or more very specific varieties of sand that are peculiarly suited to this use. In other words, your average beach sand need not apply.
There are currently several virtually unknown companies that mine the kind of sand the energy industry needs to continue its domestic fracking efforts – efforts, BTW, that have radically reduced the price of fuel in the U.S. while at the same time severely limiting the ability of OPEC ever to cripple our country again, at least in the foreseeable future.
When the fracking boom started a few years back, but before it temporarily collapsed along with oil prices, a few of these fracking sand companies were flying high. But after the recent collapse in energy prices (which happened before the current renewed boom), these stocks were beaten into oblivion. Now, however, they’re poised to rise again, assuming the stars remain aligned. That’s why they’re worth looking at again for potential future investment.
The companies we’re looking at include:
- Emerge Energy Services (EMES)
- Fairmont Santrol Holdings, Inc. (symbol FMSA)
- Hi-Crush Limited Partners (HCLP)
- Select Energy Services (WTTR)
- Smart Sand, Inc. (SND)
- U.S. Silica (SLCA)
Here’s an abbreviated closer look:
Emerge Energy Services is not a pure play, as the company is involved in other energy support services in addition to its fracking sand mining activities. In our opinion, it’s one of the weakest entries here and, at the moment, the company holds the least interest for us.
Fairmont Santrol Holdings, Inc. This one could be our first move and is likely our favorite speculative (spec) stock right now. Its per share price is cheap but volatile, and sits at the rock bottom of its trading range due to horrendous numbers it posted in 2016. For that reason, if things turn for the company, as seems likely, this one could really get its mojo back big-time.
Hi-Crush Limited Partners. We’ve owned this stock before, purchasing it as an IPO and holding it for a time because of the swell dividend it used to pay as a Master Limited Partnership (MLP). But when the energy downturn pancaked the stock, the dividend was eliminated. The company’s business has picked up substantially along with the current fracking boom, adding the possibility of a restored dividend along with a capital gain potential. Nice.
Smart Sand, Inc. Some analysts like this one a lot. In many ways, it resembles Fairmont Santrol. But we know very little about it so we need to do more homework on this one.
U.S. Silica. This company has been around a long time, the product of numerous mergers and acquisitions over the years. For a long time, its corporate HQ (and a large sand mine) was located in Berkeley Springs, WV where this writer has a summer home. But when it put itself back out on the market in an IPO a few years back, it moved its HQ across the Potomac River and downstream a-ways to Frederick, MD to get closer to the Washington, D.C. transportation hub. (The Berkeley Springs sand mine is still there, but only has about 10 years left in it.)
Unlike any of the other companies on this list, U.S. Silica actually mines and sells a variety of different industrial sands. The Berkeley Springs mine, for example, produces a sand that is apparently much in demand in the manufacture of fiber cable, important in the high-speed networking world. In other words, this company is considerably more diversified in both product and location of mining operations than the others, giving it some downside protection should energy prices slip again.
Select Energy Services. We’ve kept this one for last, as we’ve only recently discovered it and because it’s not exactly a sand mining company. Remember when we noted above that fracking fluid was almost totally a combination of sand and water? Well, Select Energy Services provides a lot of the water, and that service is vastly more complicated than we have the time or patience to describe here.
Essentially, however, the potential attraction of this play is that fact that a water provider like Select Energy not only has to obtain the water and bring it to the fracking site. It also has to retrieve the water once it’s used in fracking, and then process it and haul it out again due to valid environmental concerns.
This is a fragmented industry, and Select Energy is currently the largest purveyor of water services at fracking sites by far. It only recently IPO’d, and its most recent quarter was awful, depressing the price. But we’ll be researching it some more before we make up our minds. We’re interested, though, because monopolies are very cool to invest in (no competition), even though they’re not always so good for consumers.
We’re not moving on any of these stocks just yet. But we thought we’d share them with you in case you want to explore them yourselves. No recommendations. We don’t really do that here. But these are interesting ideas that most of the Wall Street playahs aren’t paying attention to. When a small investor can pull this off, getting there first by spotting stocks flying under the big firms’ high-speed computing, HFT and quant radar screens is nearly always the best way to make some real money.