Pegging Nails on the PEG

I know it's not particularly fair to pick on Lenny "Nails" Dykstra column over at thestreet.com. He's seemed to have developed a nice niche writing up his exploits involving deep-in-the-money-calls. I'm not about to criticize his advocacy of some conservative options trading (or at least as conservative as options trading can get).

The Pig is pegging Nails on his use of the PEG ratio.

I explored the PEG early in this blog's existence. I still use it as a quick metric; one tool of many. I treat it like a phillips head screwdriver I inherited that's just a bit too big--can't use it for every screw, but sometimes it's just right.

Lenny's raves about Nabors Industries (NBR) arise from it's appealingly low PEG of 0.20 (or 0.25 according to SmartMoney.com).

Here's Dykstra's argument:

Its balance sheet, and all of its key numbers (or at least what I consider key) are off the charts. Its P/E-to-growth ratio, based on its long-term (i.e., five year) expected earnings growth rate, is 0.20. That is such an awesome number, I was afraid to type it, thinking you might not believe me. Believe it, I checked 30 times.

But guess what? This number isn't so awesome. NBR's PEG ratio is not all that much lower than its competition in the oil drilling business.

Check 'em out:

Diamond Offshore (DO) 0.37
ENSCO International (ESV) 0.28
Noble (NE) 0.35
GlobalSantaFe (GSF) 0.31
Transocean (RIG) 0.42

To give Lenny some credit, NBR is the best pick, according to the numbers. Morningstar gives NBR and its driller brethren one star, but gives NBR grades of B- for growth, B- for profitability, and A for financial health. Not a stellar GPA, but good enough to make it to the head of this special ed class:

DO - C- D+ A-
ESV - D C+ A
NE - D+ B A+
GSF - D C A
RIG - D- D B-

And Lenny does offer up some fruits of his extensive research:

After some extensive research, I have donned my work gloves, put my ear plugs in securely, and I will commence "drilling for some serious oil" this week.

Nabors Industries (NBR:NYSE) , one of the world's largest drilling contractors, is about as good as it gets. The company has nearly 600 land drilling rigs and more than 900 land workover and well-servicing rigs. Nabors Industries operates across the U.S. and in Africa, Canada, Central and South America, and in the Middle East. Its offshore equipment includes platform rigs, jack-ups, barge drilling rigs, and marine support vessels. Nabors also provides oil field hauling, maintenance, well logging, engineering, and construction services, and invests in oil and gas exploration.

I think what Lenny means by extensive research is cutting and pasting the company profile off of MarketWatch, or an 8-K filing.

I keed. I keed. Go Phils.

Dykstra overemphasizes the power of the PEG. If the PEG were so damn useful, then screw diversification, and let's load up on these "cheap" drilling stocks!

What I see Dykstra doing is very simple. He's making a simple bet that oil will head back up between now and June. Seems a very reasonable bet to me. I've made a smaller, safer version of this bet with the EEP purchase. But he's overstated his case for NBR's PEG.