NOW Inc (DNOW) Is Bet On Oil Prices; Laughing Water Capital Exits Position

Laughing Water Capital sold its entire stake in NOW Inc (NYSE:DNOW) during the third quarter, calling it a bet on oil prices. NOW Inc. is a $1.1-billion market cap distributor to the oil and gas and industrial markets. Among the hedge funds tracked by Insider Monkey, there are 12 funds with positions in the oil company. In its Q3 investor letter (you can download a copy here), Laughing Water Capital detailed why it decided to exit the position in NOW Inc.

Here is what Laughing Water Capital’s Matthew Sweeney said about the oil company in the letter:

I have sold our shares in DNOW. The original thesis was that an investment in DNOW was an investment in the beaten-up oil space that would benefit independent of oil prices as management used their massively over-capitalized balance sheet and long track record of successful M&A to gain market share by buying struggling Mom and Pop players in the oil field distribution business. Shares rallied quite a bit from our purchase price as the price of oil recovered, but quickly gave back the gains. The price of oil was never germane to our thesis so we should have exited on this brief move, but we did not. Management has since signaled that the rally in oil prices has made M&A increasingly unlikely because bid-ask spreads between buyers and sellers are too wide. Absent the opportunity to take market share through M&A, in my view DNOW is a bet on oil prices, and I have no reason to think I am any good at predicting oil prices so we exited the position.

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Houston-based NOW Inc (NYSE:DNOW) operates primarily under the DistributionNOW and Wilson Export brands. The company sells products for the upstream, midstream, and downstream and industrial market segments. It offers more than 300,000 stock keeping units, including pipe, valves and valve automation, fittings, instrumentation, mill and industrial supplies, tools, safety supplies, electrical products, drilling, and production equipment, artificial lift, pumps, fabricated equipment, and industrial paints.

NOW Inc. booked a loss of $9 million, or $0.08 loss per share, for the third quarter, compared to a loss of $56 million, or $0.53 per share, a year ago. Revenue for the quarter was $697 million for the third quarter, compared to $520 million in 2016.

Shares of the company have plummeted nearly 48% since the beginning of the year. During the last 12 months, the stock has dropped more than 45%. On Friday, the stock closed down 1.11% to $10.70. The consensus average target price on DNOW is $14.00, while the consensus average recommendation is ‘HOLD’.

Meanwhile, you will love reading Laughing Water Capital’s investment thesis on IES Holdings, Franklin Covey, Redknee Solutions, EZCORP, and Iteris.