Halliburton shares fell for the wrong reason early Tuesday — here's why we're buying more

Published Tue, Apr 19 20229:04 AM EDTUpdated Tue, Apr 19 202210:23 AM EDT

We bought 250 shares of Halliburton (HAL) at $42.38 each. Club rules prevented us, but not members, from catching the down open. Following Tuesday's trade, the portfolio owns 1,750 shares of HAL, increasing its weighting in the portfolio to about 2.24% from 1.93%. Oil services company Halliburton reported first-quarter earnings before the opening bell Tuesday morning. It was a top and bottom line beat with revenue of $4.28 billion — up 24% year over year — exceeding estimates on FactSet of $4.2 billion. Adjusted earnings-per-share of $0.35 edged out expectations for $0.34. In addition to the results, CEO Jeff Miller provided encouraging commentary about the capital expenditure cycle in the press release. "We see significant tightness across the entire oil and gas value chain in North America. Supportive commodity prices and strengthening customer demand against an almost sold-out equipment market are expected to drive expansion in Completion and Production division margins," Miller said. "I expect our strong international business to increase throughout the remainder of the year. First quarter revenue growth in all our international regions together with North America demonstrates that this multi-year upcycle is well underway," he added. Despite the positive earnings news and CEO updates, Halliburton shares lost nearly 3% in premarket trading. At the time this story was first published — before Tuesday's market open — we attributed the premarket decline to a few things. First, the company recorded a pretax charge of $22 million in the first quarter, primarily related to the write down of all its assets in Ukraine, including $16 million in receivables, due to the ongoing conflict. Second, on margins, even though Drilling and Evaluation (D & E) margins eclipsed 15% for the first time since 2010 and were above expectations of 13.5%, investors are likely nitpicking the margins from the Completion and Production (C & P) segment, which were lighter than expected at 12.58% vs. 14.76%. Cash outflows of $183 million was well short of free cash inflows estimates of $229 million due to working capital build. Third, expectations. Halliburton has been one of the great stocks this year in a terrible market, rising roughly 82% as of Monday's close compared to a nearly 8% decline in the S & P 500 . It's worth noting that Halliburton stock turned positive shortly after Wall Street's open, hitting another 52-week high. Investors seemed to come around to our reasoning, in an overall market that gained momentum to the upside. We committed to the HAL trade before Tuesday's opening bell. So members who acted quickly were able to buy when the stock was still lower. Our Club rules dictate that we had to wait to execute our buy. Here's why we're buyers of Halliburton. On the pre-tax charge, this news was not a surprise given the conflict, yet some might see write-down and immediately sell the stock. On margins, although C & P margins were light this quarter, we are willing to look past this because the cycle is still in its early days. The CEO said in the quote above that margins are positioned to expand because the supply is tight, causing customer demand to strengthen in an almost sold-out equipment market. We also believe Halliburton's past cost reduction actions will lead to meaningful operating leverage in North American as activity accelerates. On the expectation game, due to the stock's outperformance and the lack of fireworks Tuesday morning — no big upside surprise — some short-term minded investors may have opted to take profits. We're taking the other side of the trade and buying because we think Halliburton is in the early days of a multiyear investment cycle in drilling activity. (Jim Cramer's Charitable Trust is long HAL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Workers walk towards Halliburton Co. "sand castles" at an Anadarko Petroleum Corp. hydraulic fracturing (fracking) site north of Dacono, Colorado, U.S., on Tuesday, Aug. 12, 2014.

Jamie Schwaberow | Bloomberg | Getty Images

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