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Small stocks, big rewards?

Published: December 16, 2012

Dear Mr. Berko: My pharmacist son-in-law likes to research unknown stocks that trade below $10 a share and invest in a few hundred shares of each. He has had a few big wins, but I think his many small losses have used up most of his big gains. I've never bought any of the stocks he researches, but his last two stock picks, Halcon Resources and Research Frontiers, interest me because I'm an oil geologist — Halcon — and because I know a little bit about the glass business — Research Frontiers. Your opinion would be helpful in helping me make a decision to invest $10,000 in each stock.

DL, San Antonio, Texas

Dear DL: Halcon Resources (HK-$6.60) is a small, independent oil and gas producer with 190 employees. HK is up from the low of its 52 week trading range ($2.25 to $13.25) due to five very interesting reasons:

(1) Its substantial reserves (1.3 billion risk free barrels of oil) and production potential from its fecund fields in Texas, Louisiana, Oklahoma and Kansas.

(2) Its new CEO, Floyd Wilson, recently acquired 3.1 million shares. Wilson has an impressive record of developing energy and production companies then selling them for a handsome profit. His most recent success was Beta Oil & Gas that he bought for $60 million in January of 2004 and in August of 2011 sold it to BHP Billiton for $15 billion.

(3) It's unusual for T. Rowe Price, Wellington Management, Fidelity, Vanguard, Barron and BlackRock to own large positions of a stock trading at $6 a share. Together they recently reported owning over 60 million shares, and the private Encap Energy Capital Fund VII reported 3.7 million shares last September.

(4) HK is planning on developing over 1 million acres in its Texas, Oklahoma and Ohio fields, expecting to reach 4.1 million barrels a day.

(5) Since 2005, while oils prices were rising, this company lost over $160 million. However, management believes HK will earn a nickel in 2012, 70-cents in 2013 and $1.20 in 2014 and increase its rigs in operation from 13 to 35 next year.

HK has positioned itself to generate impressive reserves and production growth. If oil or gas prices rise due to political problems in Iran or Venezuela or if the U.S. has an unseasonably cold winter, HK's earnings would benefit enormously and so would the stock price. And if CEO Floyd Wilson's skills gain more traction, Wall Street may take notice and push HK shares to the low teens. This looks like a fair speculation and it seems your son-in-law did some sound research.

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