Monday, June 28, 2010

Value In A Volatile Market: APOL and RIG

If asked, all investors would agree that the stock market has been very volatile in the past few years. Volatility can cause a lot of problems for traditional long term investors, but some investors can use volatility to purchase stocks at low levels and achieve better returns in the long run. For example Transocean and Apollo are facing liability problems which has led to increased volatility. I am going to examine these liability issues and determine if one could benefit from the stocks current lows.

For related articles or penny stock websites click on the links provided by Google at the Top of this Blog or on the right side

Transocean Inc. (RIG)
Current price: 49.77
52 week range: 41.88 - 94.88

Transocean offers offshore drilling services for natural gas and oil. The company currently owns 138 rigs including the infamous rig that led to the Gulf Oil Spill.

After the Gulf Oil Crisis began, there has been large sell-offs of Transocean due to investors concerns of their liability in the Spill. RIG's stock price is currently down 54% from explosion date. Transocean's contract with BP states Transocean's responsibility for pollution involves leaks "originating above the surface of the land or water."

BP is still trying to push some liability on Transocean and it is still uncertain whether or not BP will be successful transfering some of the liability to Transocean.

Future Outlook
Even if RIG has not bottomed out, I still think their current price is extremely low considering the past success of the company. In 2009 the company reported $11.55 billion in revenue. Recently BP announced they would pursue GBP 470 million of RIG's insurance policy which accounts to $706 million. Sources estimate Transocean's insurance coverage to be just under $1 billion. With the combination of of insurance, revenue and RIG's cash position; they should be able absorb any losses that might arise if BP is successful at transferring some of the liability to Transocean.

Apollo Group Inc. (APOL)
Current price: 44.50
52 week range: 43.49-76.86

Apollo Group is a for-profit education service provider offering undergraduate, graduate and doctoral levels through its wholly-owned subsidiaries The University of Phoenix, Western International University, Institute for Professional Development (IPD), The College for Financial Planning Institutes Corporation, and Meritus University.

Recently The U.S. Court of Appeals reversed a securities class-action lawsuit decision which was decided by a lower court in favor of Apollo. The damages for the lawsuit range between $166.5 million and $277.5 million. Apollo's net income was just under $600 million in 2009 with revenues of $3.9 billion. If Apollo is forced to pay the entire $277.5 million it most likely have little impact on Apollo's operation.

Apollo's valuation ratios are at very low levels when compared to their five year averages.

Current       Five year average
P/E 10.9     21.5
P/S 1.5         3.5
P/B 5.0       11.9

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