Valuations are important, but they are not everything. In fact, in an overvalued market, it is often best to stick with the stocks that are best of breed. And, though it is near recent highs, Schlumberger is just that opportunity.

Schlumberger is at the top end of its range – matching highs last seen in 2011. At that time, SLB got hung up in the $95 price range before falling back to $60. Since then, it has been a steady march higher and with the break back above $80 in July, the price shot higher.
Over the past 30 days, SLB has traded between $86 and $95. The price closed on Tuesday at $94. The stock is trading above the 50-Day Moving Average ($89.76), as well as above the 200-Day Moving Average ($80.28). Since the beginning of September, SLB is in an upward trend. If the stock is able to pierce through these levels ($95), the next major resistance points are $100 and the all-time highs of around $112. In total, Tradespoon’s technical indicators give a bullish view of SLB.

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A LOOK AT FUNDAMENTALS

Fundamentally, Schlumberger is also showing bullish indicators. Schlumberger’s trailing price-to-earnings ratio stands at 19.55, below the industry average of 21.57 but above the S&P 500 average of 18.63. This puts SLB P/E smack in the middle of its historical range. Over the last five years, the company’s shares have traded in the range of 8.25 to 30.59 times trailing 12-month earnings.

Schlumberger’s current Price/Sales of 2.73 is above the industry average (1.36). SLB’s head to head comparison to its main competitors shows that SLB has the highest gross margin in the group. Furthermore, the company’s operating margin is by far the best in comparison to the competition, and also much better than the average for the industry.
Earnings are also superior in comparison to those of its competitors. As mentioned, though the stock trades at a lower P/E multiple than its competitors, SLB’s PEG ratio in line with the industry average.
Further, SLB is currently trading below its intrinsic value of $99.41, further confirming that the stock is undervalued at these levels.

OPTIONS STRATEGY RECOMMENDATION

Technical and fundamental indicators both show short-term bullish signals for SLB.  Investors should consider the following debit call spread: Buy December 2013 $95 calls and sell the December 2013 $97.5 calls for a net debit to start of $0.90. Tradespoon recommends holding until spread price reaches $1.80, which would correspond to an equity price of $96.80. This strategy clearly defines the risk, while giving a high probability trade.