A Word Of Caution

Stocks trading for less than $1 are loosely termed "penny" stocks. Petro-Reef Resources Ltd. (PER) is selling for less than $1 per share. While we stand by our ratings methodology for long term value investors, often times "penny" stocks can be more volatile. Because many "penny" stocks are lightly traded their stock price can fluctuate because of a single large trade. Also, there is generally less analyst coverage of such "penny" stocks and thus less information from which to base our rating.

While this company may not get as much press because of its low stock price, please take a moment to look at the RazorWire feed on the right hand side of the report. Each time Petro-Reef Resources Ltd. is mentioned on business television or influential blogs recently should be displayed. This helps to bring you up to speed on any major issues they are facing right now.

Therefore, (and as always), check additional sources and available information regarding Petro-Reef Resources Ltd. before making an investment decision.

PER Revenue

As a value investing shop, we are interested in seeing how PER's revenues measure up against past performances. One easily understandable way of doing that is to compare Price to Sales per share levels over a given time frame. Assuming it is available, Ockham prefers to look at ten years of history (for this stock there are 10 years of history available) and we weigh recent years more heavily. This allows us to find weighted average historical high and low Price to Sales ratios, which give us a better idea of the stock's current underlying value. Using this method, we have established a high range for Price to Sales of 8.33x and the low end of the range at 2.47x.

With respect to these historically rational metrics, notice that the current Price to Sales per share ratio for PER of 1.34x is well below its normal historic Price to Sales levels. At a price of 0.36, PER is 76% below where we would expect to see it. Clearly, this stock looks undervalued compared to historical levels, at least on a Price to Sales basis. This will positively affect our analysis because it is rare to find a stock this far below historical norms, and we would expect some price appreciation to bring this metric back towards a more normal range.

PER Cash Earnings

Cash (and the ability of a company to generate it) is a pivotal analysis at Ockham Research. With PER, we have found that we don't have as many years of positive Cash Earnings as we would like in order to run an analysis. When a company like PER has had several years of negative Cash Earnings mixed in with their positive years, it can be difficult to really get a good analysis of their potential. At Ockham, we always advise that Cash is key to any investment, so investors should consider the lack of positive years available as a signal that other types of analysis may need to be more heavily relied upon in PER's case.

PER Dividends

A positive Ockham rating does not require a company to pay out an inviting dividend or a dividend at all. However, we believe dividends provide a useful measure of a company's inherent expectations. While we do like to see companies with healthy and growing dividends, it is not appropriate for all companies, especially those focused on growth. In this regard, we regard PER as neutral because we do not have historical data for this company's dividends. We will being incorporating this into our analysis as soon as that data is available.