Callon Petroleum Spikes on Breakout

Shares in Small-Cap Star Callon Petroleum Company (CPE) spiked on Friday, climbing more 10 percent on heavy volume in early trading without a clear news item driving the action. The company is on the rise since announcing a cash dividend of $1.25 a share for its 10 percent Series A Preferred Stock. The company is an independent oil and gas company operating wells in the Permiam Basin in West Texas.

The day’s gains set a new 52-week high for Callon at $7.95 a share before pulling back in the late morning. It has its Q4 2013 earnings report scheduled for release on Mar. 13.

The reason for the climb may be better explained by its technicals than anything else. Callon’s chart has been an interesting one this year, with a few clear patterns. The first being a triangle pattern that started to form after the stock’s peak of $7.59 a share in mid-October, its previous 52-week high. Since that point, sloping resistance and support levels have been converging as the stock consolidated.

However, another notable pattern involves the stock’s 50-day SMA. The crossed its 50-day SMA from below in early January and, starting on the 13th of that month, it began to treat it as a support level. In early February, shares started to fall below the support level set by the triangle patter, making it appear that a downward breakout was possible.

However, the stock continued to trade above the 50-day SMA and, beginning on Feb. 27, the stock began making a positive breakout. Since that point, Callon is up almost 17.5 percent. Taken as a whole, Callon has been on a major run, more than doubling in value since last summer.

Using Equities.com’s EVA Reports, we can take a closer look at the stock using the DuPont System, which considers the classic metric of return on equity (ROE) differently by separating it into three different components.

At first blush, the investor enthusiasm for Callon may seem misplaced as the company lags well behind the industry average in ROE. However, a closer look could indicate that Callon has more going for it than that number alone would indicate.

For starters, the company’s net margin is way ahead of its industry peers, a metric that shows more profitability. For net margin, the higher the better, and it’s very high for Callon.

This is different from asset turnover and the equity multiplier, where the ideal is to be as close to industry average as possible. In both cases, Callon lags behind their competitors. However, Callon’s sagging equity multiplier comes as the company drastically reduced its debt load from 2011 to 2012. And, while industry average is ideal, it’s better to be below average than above it when it comes to the equity multiplier.

So, while Callon could potentially improve its bottom line by taking on more debt to turn over inventories more, its very strong net margin is most likely what’s driving investors to the stock and supporting its current breakout. These numbers would seem to indicate that this Small-Cap Star has the potential to hold its current gains and build on its success.