This Value Stock Could Be One of the Best Trades: CJES

Value is widely used to find long-term investments, but it can also be used by traders as a way to reduce risk. Value stocks generally have low price-to-earnings (P/E) ratios or other metrics that are below market averages. The fact that a company trades at a low value reduces the risk of a large price drop since there is usually little room to fall.

For example, if the average P/E ratio in the stock market is about 15, a stock selling with a P/E ratio of 5 is undervalued. If earnings are stable or growing, it is unlikely that the P/E ratio could fall an additional 50% even though the market average P/E ratio could fall by 50%.

To avoid the value trap -- buying stocks that have a low P/E ratio and continue to trade at low P/E ratios for years -- traders can add a relative strength (RS) screen and buy only value stocks that have high RS. This indicates the stock price is moving up, possibly because other investors recognize the value and expect more gains.

One stock that meets those criteria right now is C&J Energy Services (NYSE: CJES), a small-cap oil services company. CJES provides services and equipment needed for hydraulic fracturing processes. Fracking is a potentially controversial topic, and over time, there will be changes within the industry. CJES seems positioned to take advantage of any changes.

Fracking is regulated at the state level and states are always likely to supplement any federal regulations. CJES minimizes regulation risk by diversifying geographically and is active in 9 of the 10 largest shale plays in the country.


Source: http://www.cjenergy.com/investor-relations/

CJES also offers a variety of services and manufactures some of the equipment that needed for the process. In a worst case, the equipment could most likely be adapted for other uses.

This company has grown revenue at an average annual rate of about 130% for the past three years. Over that time, the company has gone from losing money to earning $3.82 a share in the past 12 months. At a price of $21.85 a share, the stock is trading with a P/E ratio of about 5.7. Earnings growth is expected to decline next year with earnings per share (EPS) of $3.02 in 2013, and annual EPS growth averaging 20% a year after that.

If CJES traded at only 10 times next year's expected EPS, the stock would be worth $30, giving traders a gain of more than 37%. The chart shows that $28 is a reasonable price target.

CJES has been a publicly traded company for less than 18 months and has been in a trading range for most of that time. The depth of the trading range, about $6, can be added to the top of the range, near $22, to find the price target. The stochastics indicator is bullish and RS is above 80, which is also bullish.

In addition to buying the stock at a low P/E ratio, traders who buy CJES should place a stop-loss near the center of the trading range, at $19. That makes the risk equivalent to about 12% of the amount invested.

Traders looking to decrease the risk, in dollar terms, should consider call options. It could take a year for CJES to move significantly higher and options are available with an expiration date of January 2014. Calls expiring more than a year from now with an exercise price of $25 are trading for about $2. If CJES reaches $28, these options will be worth at least $3. The risk is limited to the amount paid for the options.