This article is part of our Rising Star Portfolios series.
Like many of my fellow Fools, I view the recent market chaos as a great buying opportunity for some quality names out there that have fallen more than I think they should have. Tomorrow, then, I'll be buying one new stock for my Rising Star portfolio and also adding to one of my existing positions.
Time to get oily
I've long been a fan of National Oilwell Varco (NYSE: NOV), first in working with Tom Gardner to recommend it to our Motley Fool Stock Advisor members and later in owning shares myself. This is a best-of-breed company that supplies everything oil and gas drillers need to do their jobs. From giant floating rigs all the way down to drill bits, motors, and pumps, National Oilwell Varco has it all and delivers to 825 locations on six continents. It also provides a range of services and support, and even runs its own supply stores on offshore drilling rigs.
Why buy: The business has a forward P/E of 14, strong growth prospects, and a solid balance sheet. It's a regular on my energy services industry value screen, which is designed to find promising stocks while avoiding value traps.
National Oilwell Varco has many competitive advantages, including the economies of scale that come with being a $29 billion large cap with the dominant position in the industry. In fact, Morningstar estimates the company has a 60% share in the rig equipment market and that 90% of all rigs carry at least some of its equipment. All of this breadth and dominance provides another big advantage: Rather than buying various parts from different suppliers, it's very easy and efficient for customers to rely on National as a one-stop shop.
I'm also very excited to get some exposure to oil and gas in my portfolio. This offers a great form of diversification, as National Oilwell Varco will generally benefit from rising oil prices, which of course tend to dampen growth with most other businesses in the form of rising costs.
Risks: The company reached its current dominant position through a combination of organic growth and acquisitions. Management plans to continue this strategy for the foreseeable future and made 12 purchases in 2010 alone for a total of $556 million. There's always the risk with this strategy of overpaying, or that some acquisitions will not integrate well into the existing company. But National Oilwell Varco's management has been doing this for years and has the process down.
There are some quality competitors out there that also have deep pockets, notably McDermott (NYSE: MDR), Schlumberger (NYSE: SLB), and Weatherford (NYSE: WFT). Each has a somewhat different focus in the industry, however, and I'm comfortable starting off our oily exposure with National Oilwell Varco.
Finally, all of these companies are obviously affected by the ups and downs of the industry, and these stocks can take a hit when energy prices swing downward or when catastrophic events take place, such as the recent Gulf drilling moratorium caused by the Deepwater Horizon disaster.
National Oilwell Varco is off nearly 20% since the market started getting jittery about debt ceilings and defaults. I'm ready to start off with a half position, or about 2.5% of my portfolio's first-year value.
More chips
I bought semiconductor equipment maker Kulicke & Soffa (Nasdaq: KLIC) at the end of June, and the stock is down 20% since. However, I expected this $600 million small cap to be volatile, and all the craziness we've experienced since has exacerbated the situation. After studying the company's third-quarter earnings report and listening to the conference call, I'm even more convinced that management is maintaining a long-term focus and setting the business up well for the years to come.
My original investing thesis still holds. Among its strengths, K&S is leading the way in the industry's transition to lower-cost copper wire, instead of gold, for wire bonding processes.
I like management's practice of working closely with end customers -- names such as Samsung, Micron Technology (Nasdaq: MU), and Texas Instruments (NYSE: TXN) -- during the R&D and design processes. This helps foster stronger relationships and increases customer switching costs. Finally, trading at barely 6 times forward earnings, the stock still carries a low multiple and a strong balance sheet.
Trying to get a handle on where this business or the industry is heading in the short-term is a losing game. The third quarter turned out better than management expected, but CEO Bruno Guilmart lowered guidance for current fourth quarter -- and that's why we're 20% lower than our initial purchase price. K&S is definitely beholden to macro events and will continue to see its ups and downs, but I'm adding more shares with the knowledge of where this company can be five years down the road.
With this purchase, I'll be filling out a full position in K&S. Both of these buys will go through sometime tomorrow. If you're interested in either of these companies, add them to our free My Watchlist service by clicking the links below.
- Add National Oilwell Varco to My Watchlist.
- Add Kulicke & Soffa to your My Watchlist.
This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).
