(Image: Zen Buddha Silence by Marilyn Barbone.)
January 26, 2020
We continue with examples of Boole’s quantitative investment process in action.
Last week, we looked at Macro Enterprises (Canada: MCR.V): http://boolefund.com/macro-enterprises-mcr-v/
This week, we are going to look at Ranger Energy Services (RNGR), which may be an even better opportunity.
Ranger Energy Services comes out near the top of the quantitative screen employed by the Boole Microcap Fund. This results from four steps.
First we screen for cheapness based on five metrics. Here are the numbers for Ranger:
- EV/EBITDA = 2.96
- P/E = 17.51
- P/B = 0.53
- P/CF = 2.20
- P/S = 0.31
These figures—especially EV/EBITDA, P/B, and P/CF—make Ranger Energy Services one of the top ten cheapest companies out of over two thousand that we ranked.
Next we calculate the Piotroski F-Score, which is a measure of the fundamental strength of the company. For more on the Piostroski F-Score, see my blog post here: http://boolefund.com/piotroski-f-score/
Ranger has a Piotroski F-Score of 8. (The best score possible is 9, while the worst score is 0.) This is an excellent score.
Then we rank the company based on low debt, high insider ownership, and shareholder yield.
We measure debt levels by looking at total liabilities (TL) to total assets (TA). Ranger has TL/TA of 34.3%, which is fairly low.
Insider ownership is important because that means that the people running the company have interests that are aligned with the interests of other shareholders. At Ranger, insiders own 60% of the shares. This puts Ranger Energy Services in the top 2.2% of the more than two thousand companies we ranked according to insider ownership.
Shareholder yield is the dividend yield plus the buyback yield. The company has no dividend. Also, while it has bought back some shares—which is good because the shares appear quite undervalued (see Step Four)—this has been offset by the issuance and exercise of stock options. Thus overall, the shareholder yield is zero.
Each component of the ranking has a different weight. The overall combined ranking of Ranger Energy Services places it in the top 5 stocks on our screen, or the top 0.2% of the more than two thousand companies we ranked.
The final step is to study the company’s financial statements, presentations, and quarterly conference calls to (i) check for non-recurring items, hidden liabilities, and bad accounting; (ii) estimate intrinsic value—how much the business is worth—using scenarios for low, mid, and high cases.
Ranger operations are reported in three segments:
Completion & Other Services
- Primary operations include wireline (plug & perf and pump down)
- Well Testing, Snubbing, Fluid Hauling and Tank Rental
- Locations in Permian and DJ Basins
Well Service Rigs & Related Services
- Primary operations include well completion support, workovers, well maintenance and P&A
- Related equipment rentals include power swivels, well control packages, hydraulic catwalks, pipe racks and pipe handling tools
- Locations in the Permian, DJ, Bakken, Eagle Ford, Haynesville, Gulf Coast, SCOOP/STACK
- Primary operations include the rental of Modular Mechanical Refrigeration Units (“MRUs”) and other natural gas processing equipment
- Locations in the Permian, Bakken, Utica, San Joaquin and Piceance
Ranger Energy Services has a market cap of $107 million and an enterprise value of $148 million. The company recently signed new multi-year contracts with oil majors including Chevron and Conoco. Ranger continues to gain market share due to its high spec rigs and relatively low debt levels. Moreover, the company continues to pay down its debt—its target debt level is $0.
Intrinsic value scenarios:
- Low case: Ranger is probably not worth less than book value, which is $12.98 per share. That’s about 90% higher than today’s share price of $6.83.
- Mid case: The company can achieve EBITDA of $75 million, and is likely worth at least EV/EBITDA of 5.0. That translates into a share price of $21.41, which is 214% higher than today’s $6.83.
- High case: Ranger has said that in a recovery, it could do EBITDA of $100 million. The company may easily be worth at least EV/EBITDA of 6.0. That translates into a share price of $35.83, which is about 425% higher than today’s $6.83.
Ranger Energy Services is one of the top 5 most attractive stocks out of more than two thousand microcap stocks that we ranked using our quantitative screen. Moreover, all the intrinsic value estimates—including the low case—are far above the current stock price. As a result, we are “trembling with greed” to accumulate this stock for the Boole Microcap Fund.
In addition to company financial statements and presentations, I used information from the following two analyses of Ranger Energy Services:
(Note: If you have trouble accessing the www.valueinvestorsclub.com analysis, you can create a guest account, which is free.)
BOOLE MICROCAP FUND
An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time. See the historical chart here: http://boolefund.com/best-performers-microcap-stocks/
This outperformance increases significantly by focusing on cheap micro caps. Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals. We rank microcap stocks based on these and similar criteria.
There are roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.
The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods. We also aim to outpace the Russell Microcap Index by at least 2% per year (net). The Boole Fund has low fees.
If you are interested in finding out more, please e-mail me or leave a comment.
My e-mail: firstname.lastname@example.org
Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.