Technically, SandRidge Energy Is a Sell

Technically, you should sell SandRidge Energy (NYSE: SD  ) right now.

We examined the company using Moving Average Convergence-Divergence (MACD), which is one of the most popular and long-used technical analysis indicators. Technical analysis is the field of buying and selling stocks not based on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

Signal line crossover is one of the more common ways to interpret MACD. It uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below, you can find a current chart of SandRidge Energy's MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a Moving Average Convergence-Divergence chart! OK, we're jesting -- but in all seriousness, this is actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 23 times!

A better way to size up companies
Here at Fool.com, we're more interested in other measures of company value. When we look at SandRidge Energy and its peers, here are the areas that interest us:

Company

SandRidge Energy

Apache (NYSE: APA)

Brigham Exploration (NYSE: BEXP)

Market Cap (billions)

$1.7

$31.6

$1.9

Qtrly Rev Growth (YOY)

36%

40.7%

206.4%

Revenue (TTM, billions)

$0.7

$10.5

$0.1

Operating Margin (TTM)

(41.6%)

46.2%

37.4%

P/E (TTM)

N/A

11.3

47.8

PEG (5-year expected)

1.1

1.1

0.7

Source: Yahoo! Finance and Capital IQ, a division of Standard and Poor's. TTM = trailing 12 months.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity as well as qualitative values like competitive advantage and managerial effectiveness. These areas led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best solution for individual investors to build lasting wealth and achieve their financial goals.

So when you look at SandRidge Energy, don't evaluate it for crossing a momentum line. Buy or sell it because:

  • SandRidge operates as a major player along the West Texas Overthrust and the Permian Basin, focusing mainly on the West Texas region.
  • While SandRidge has traditionally been seen as more of a gas producer, fellow Fool writer Toby Shute feels the company has overpaid for oil assets.
  • Still, SandRidge has compelling assets that has observers drooling. Some feel the company could generate operating cash flow nearly half of the company's share price this year.
  • With a low amount of cash and high debts, SandRidge provides one of the riskier plays in the energy industry. However, with the potential of its West Texas assets, the company also could provide outsized returns for investors with a higher risk tolerance who have diversified bets against several high risk companies.

Want to sell SandRidge Energy based on technical merits today? Technically, odds are that you should flip and buy SandRidge Energy sometime very soon. If that sounds like madness to you, well, we here at Fool.com agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy-and-hold is dead!" get louder, and individuals race toward schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time, most technical analysis schemes are a relatively simple science, eliminating the vast complexities of evaluating true company value. However attractive, this theory is ultimately the wrong path for individual investors. Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with as much as 75% of market trading now done by Ph.D-level programmers at massive high-frequency funds, even if opportunities existed, what chance would an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to Massey University's study across 49 countries, which showed that more than 5,000 trading rules add no value. However, the real reason to forget about technical investing is what we mentioned earlier: SandRidge Energy crossed the crossover 23 times across the past year! While traders might not buy and sell with each crossing, cases of high momentum are normally short lived. The amount of trading in most technical analysis schemes racks up commission fees and short-term capital gains taxes, eating away at profits. More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time horizon.

That's why, at Fool.com, we recommend that individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. In the end, we find that to be the best contributor to long-term wealth. More importantly, it'll spare you from sitting bleary-eyed in front of a computer with a Big Gulp full of coffee, frantically buying in and out of companies. But hey, if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, then SandRidge Energy looks like a sell right now.

Looking for stocks with great fundamentals that should outperform over the long-term? The Motley Fool is recommending 50 stocks in 50 days for its new "11 O'Clock Stock" series. For more information, click here. Then come back to Fool.com every single weekday at 11 a.m. ET for a brand-new pick!

Jeremy Phillips owns shares of no companies listed above. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


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