This Stock Rigs Up Returns

How did you fare during our four-week Fiscal Fitness challenge? Personally, I've been racking up the savings. Just last night, I opted to tap my Netflix (NASDAQ:NFLX) queue instead of catching Slumdog Millionaire on the big screen.

Who's got two thumbs and an extra $12? This guy.

Too bad oil prices can't feel quite so proud of themselves these days, with crude barely holding its head above $40 a barrel. While death is now visiting overleveraged players in the oil patch, and folks like Chesapeake Energy (NYSE:CHK) and ATP Oil & Gas (NASDAQ:ATPG) struggle to constantly allay investors' liquidity concerns, oil's decline has also brought a lot of strong companies we admire down to very attractive valuations.

Rig me a winner
National Oilwell Varco (NYSE:NOV), rig builder to the stars, is an ideal outlet for your Fiscal Fitness savings. I've been singing the firm's praises for some time now, and the stock has sold off enough to win a nod from the sages at our Stock Advisor service. In fact, Tom Gardner just tapped National Oilwell Varco as one of his five Best Buys now. Let's take a closer look at what this titan brings to the table.

National Oilwell Varco -- NOV for short -- operates in three segments: rig technology, petroleum services & supplies, and distribution services. Between its manufacturing, restocking, refurbishing, and servicing work, NOV is a ubiquitous presence in the oil patch.

To demonstrate, I'll pull up the specs of a random offshore rig. Transocean's (NYSE:RIG) Sovereign Explorer sports National Oilwell drawworks, National Oilwell mud pumps, a Varco top drive, and a National rotary table. That's nearly the whole kit and caboodle, dude.

Mind-numbing numbers
With oil on the rise, NOV's results were a sight for sore eyes. Observe how operating leverage dropped all sorts of goodies to the bottom line:

Data provided by CapitalIQ, a division of Standard & Poor's.

Growth remained fierce through the third quarter, with a 40% top-line top-up. Of course, those kinds of numbers can't hold up in a deflationary environment, and NOV's stock has gotten rocked in anticipation of future shocks. From a touch over $90 in June, shares now swing in the $20 to $30 range.

So it's a steal?
That depends largely on your outlook for oil. NOV's share price has been highly correlated with oil prices over the years.

Even though I write about this stuff daily, I can't possibly do justice to the complexities of crude supply and demand in this short space. Still, I can pass along a few key principles.

First, cycles do exist, and always will. Simple though it may be, this truth is sometimes abandoned when it seems like prices are headed inexorably higher, or permanently plummeting.

Second, up and down cycles both go so far that they set the pendulum swinging in the opposite direction. In crude's case, there are forces at work that can usher in an upturn much faster than in, say, the housing market.

Halliburton (NYSE:HAL) noted one key mechanism during its recent conference call: "Any period of under-investment driven by constraints in operator spending should lead to a resurgence in commodity price." While Chevron (NYSE:CVX) has announced its intent to match 2008 capital spending, such a commitment is an exception amidst a global backdrop of diminished cash flows, overstretched budgets, and catatonic capital markets.

Underinvestment could lead to potentially severe supply shortfalls, as a lack of new projects coming onstream fails to offset producing fields' falling output. Decline curves are just as dangerous today as when we warned Fools about them back in 2007 -- arguably moreso. Mexican output fell more than 9% in 2008, and even Russia, for the first time in a decade, couldn't manage a production gain. Those were the best of times, so just imagine what we'll see as low prices make investment a harder sell.

So is NOV a sure thing for 2009?
Sadly, no. And I don't think the Stock Advisor team expects a fast buck from NOV, either. Now, will a new position in the stock likely generate attractive annual returns over the next decade? That's a different question entirely, and a far more important one.

Can you get involved in a cyclical business without becoming a twitchy market-timer? Even if you hold such a stock through the down cycles, are you compensated adequately for doing so? Cyclicals are probably inappropriate as portfolio cornerstones, but for well-diversified investors looking to add a little oomph on the next upswing, it's hard to argue with picking up a best-of-breed operator like National Oilwell Varco, especially when it's been so thoroughly beaten down.

Now that you've saved up $2,000 in our Fiscal Fitness challenge, we've got two more stocks to share with you. Discover their identities, and read more about the rest of the money-saving tips, right here.