Many stock market investors want to buy low and sell high, but how can you tell if a stock’s price is high? The answer is complicated, but there are still key characteristics that tell us that there’s an opportunity for appreciation. If you hold a stock that recently doubled, you might be anxious to sell and realize those gains. If you never got around to pulling the trigger on that stock, you might be kicking yourself for missing out on the opportunity. But wait! Before you give up on those highfliers, take a moment to consider their prospects. The stocks on this list recently doubled, but they could easily keep things going.
Schlumberger (NYSE: SLB) is an oilfield services company that was torn down with the rest of the sector in early 2020. The company provides consulting services, software solutions, and equipment used in the exploration, production, and extraction of energy. Exploration and production activity slowed down dramatically around the globe last year, and international travel nearly stopped completely. Dwindling demand and logistical hurdles caused Schlumberger’s revenue to fall more than 28% in 2020. However, as oil prices rebound and the sector comes back to life, oilfield service providers are also inching back toward results.
Schlumberger shares were nearly $90 as recently as 2017 but sunk below $14 in the first quarter of 2020. They’ve since rebounded to $31.55, handsomely rewarding investors who bought in at the bottom. However, the fundamentals indicate that the stock could keep climbing, especially if a few more quarters of positive results encourage capital to flow toward energy sector stocks.
Schlumberger trades at a forward P/E ratio of 28 and forward enterprise-value-to-EBITDA of 12.3. The stock has traded at significantly higher valuations on the basis of both metrics at times in the past five years. Last year’s energy sector turmoil seems to have made investors hesitant to dive back in, and attention is currently diverted elsewhere in the stock market. If we pull back and look at things in a historical context, Schlumberger’s price has decoupled from that of oil. When spot oil prices were previously at their current level, Schlumberger traded around $45.
If Schlumberger can get its earnings back near pre-crisis levels and reestablish its dividend from that time, there’s absolutely some upside here.
Tech giant Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) dropped below $1,100 per share last year before the tech bull market brought it roaring back. The stock now sits at $2,360. Unlike Schlumberger, Alphabet isn’t a story about a distressed company recovering. Instead, it was a haven for capital because investors correctly believed it would deliver solid financial results through the pandemic. This isn’t a value stock that’s still undervalued — it’s expensive by any valuation metric relative to its historical levels.
As such, Alphabet investors might be in for some volatility over the next few years as capital markets shake out from a wild 2020. There has to be some equilibrium achieved in valuations across different asset groups, as we’ve seen so far this year. Nonetheless, Alphabet is one of the tech leaders with wide economic moats in key markets that should provide meaningful fundamental growth for years to come.
Alphabet has a completely dominant market share in internet search services, digital advertising, and mobile device operating systems. It’s also a major player in growth categories such as streaming video and cloud computing. Each of these categories should keep growing over the foreseeable future, and Alphabet has itself firmly planted at the forefront of them all. Alphabet will obviously have to deal with the likes of Amazon, Apple, and Facebook as well as a constant onslaught of upstart disruptors. The company’s $28 billion research and development budget, acquisition strategy, and venture capital operations all make it a great candidate to withstand competitive pressures as the tech world evolves.
10 stocks we like better than Alphabet (A shares)
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Ryan Downie owns shares of Alphabet (A shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Facebook. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
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