No doubt Thursday was a tough day in the markets. The Dow dropped 358 points. But that doesn’t mean a good investing thesis still won’t work. If anything, the dip in stock prices gives you a better entry point.
“There’s nothing out there suggesting that oil prices are going to go lower long-term or that there will be less exploration and drilling for more oil,” he said. “The thesis is still sound.”
Building on that thesis, Cramer focused on another aspect of clean drilling technology: drilling fluids and the industry leader Smith International.
Fluids bring rock cuttings to the surface, keep the drill bits cool and lubricated and keep the drill hole stable. There was a time when these fluids were oil-based and there were no restrictions on a company dumping them in the ocean. But Washington has since put a stop to that, forcing companies to clean up their messes and look for cleaner, water-based fluid alternatives.
That’s where Smith International comes in. Tighter regulation pushes business toward the company because it makes these cleaner fluids. Plus, Smith gets 20% of its sales from the systems that recycle oil-based fluids and control the waste leftover from drilling.
Cleaner fluids cost twice as much as their oil-based counterparts anyway, but Smith is in a three-way oligopoly that controls 75% of the market – giving them tremendous pricing power.
Smith even has its hands in the drill-bit market. In fact, the company is number two in the business. This makes SII stock a great play on North American natural gas since Smith makes tools for the directional drilling done in all those shales Cramer’s been talking about.
As for the numbers, Smith has authorized a buyback worth 7.5% of shares outstanding, and the stock’s trading at 16.5 times earnings with a 25% long-term growth rate. That alone makes SII cheap, but the pullback in oil stocks lately just makes the stock cheaper.
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