2500 Plaza 5 25th fl Jersey City NJ 07311 phone 732-516-1648 fax 732-516-9778
ven though global oil output was at a staggering 100 million barrels per day in August, the fact of the matter is that supplies could become severely disrupted this fall as sanctions on Iran are tightened and the fallout from a huge drop in Venezuelan output is felt. The good news for investors is that some of the biggest and best oil stocks are still incredibly cheap compared to the rest of the market.
A recent report from the International Energy Agency noted a surge in supply from OPEC members but said overall world supply is tightening up and “We are entering a very crucial period for the oil market.”
We screened the Merrill Lynch energy research database looking for stocks rated Buy that pay good dividends and had solid upside to the firm’s price targets. We found four that look like outstanding picks for growth investors looking for total return.
Enterprise Products Partners
This is a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) is the largest publicly traded master limited partnership (MLP), and its midstream energy services include gathering, processing, transportation and storage of natural gas, natural gas liquids fractionation, import and export terminaling, and offshore production platform services.
One reason why many analysts may like the stock might be its distribution coverage ratio. That ratio is well above one-times, making it relatively less risky among its peers. The company’s distributions have grown for several quarters, and last year Enterprise Products announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners to $0.43 per common unit, or $1.72 per unit on an annualized basis.
Investors are paid a 5.92% distribution. The Merrill Lynch price target for the stock is $31 and the Wall Street consensus target is $33.50. Shares traded early Friday at $29.09.
This remains a top energy pick and is on the US 1 list at Merrill Lynch. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.
The company also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas and petroleum products.
Exxon reported quarterly profits that fell short of analysts’ expectations, marking the fourth time in the past five periods the company has disappointed. The miss was largely due to weaker earnings in Exxon’s refining and marketing segment due to heavier-than-anticipated maintenance and operational problems. Exxon’s business producing oil and gas bolstered earnings, with the company saying it is favoring oil output over gas drilling in its U.S. shale fields.
Investors are paid a solid 3.98% dividend. Merrill Lynch has a price objective of $110, while the posted consensus target is $88.88. The shares traded at $82.58 Friday morning.
This is one of the highest yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals. The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. The chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.
With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975, and it has increased its dividend each year since 2002.
Top Wall Street analysts believe that the company’s firm transportation commitments leave it well positioned to reap the benefits of what could be a prolonged wide differential between Midland and U.S. Gulf Coast crude prices. Occidental has firm transportation commitments of 470,000 barrels per day from Midland to the Gulf Coast, about 19.5% of total capacity, which provides full flow assurance on its own Permian production as well as arbitrage opportunity on third-party volumes.
Shareholders receive a 4.07% dividend. The $105 Merrill Lynch price target compares with a $96.57 consensus target and a share price last seen at $77.20.
Royal Dutch Shell
This company has survived the seesaw in oil pricing as good as or better than any other major integrated. Royal Dutch Shell PLC (NYSE: RDS-A) operates as an independent oil and gas company worldwide through its Upstream and Downstream segments. The company explores for and extracts crude oil, natural gas and natural gas liquids.
Royal Dutch Shell also converts natural gas to liquids to provide fuels and other products; markets and trades crude oil and natural gas; transports oil; liquefies and transports gas; extracts bitumen from mined oil sands and converts it to synthetic crude oil; and generates electricity from wind energy.
In addition, the company engages in the conversion of crude oil into a range of refined products, including gasoline, diesel, heating oil, aviation fuel, marine fuel, liquefied natural gas for transport, lubricants, bitumen and sulphur; production and sale of petrochemicals for industrial customers; refining; trading and supply; pipelines and marketing; and alternative energy businesses.
Royal Dutch Shell recently announced the start of a $25 billion stock buyback program, and while second-quarter earnings were somewhat weak, free cash flow at the integrated giant remains strong.
The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) for September remained unchanged month over month with a reading of 67. Economists polled by Bloomberg were expecting an index reading of 67. The HMI posted an 18-year high of 74 in December 2017.
Builders continue reporting solid demand for new homes. Lumber prices have eased recently, but rising costs continue to be a problem as the labor market for construction workers remains tight.
The index is based on an NAHB monthly survey of homebuilder perceptions of current single-family home sales and expectations for sale in the next six months. An index reading above 50 indicates that more builders view sales conditions as good than view them as poor.
The current sales conditions subindex for September rose by a point to 74 and the subindex that estimates prospective buyer traffic was unchanged at 49. The subindex measuring sales expectations for the next six months increased from 72 to 74.
The NAHB noted:
A growing economy and rising incomes combined with increasing household formations should boost demand for new single-family homes moving forward. However, housing affordability is becoming a challenge, as builders face overly burdensome regulations and rising material costs exacerbated by an escalating trade skirmish. Interest rates are also forecasted to keep rising. We nonetheless expect some market disruption effects due to the impact of Hurricane Florence. Single-family construction in North Carolina, South Carolina and Virginia makes up 12% of national production.
In the NAHB’s regions, three-month moving average indexes dipped in two of four regions. The Northeast index score rose one point to 54. Index scores in the South remained unchanged at 70 while scores dropped one point to 73 in the West and three points to 59 in the Midwest.
Increases in benefits outpaced wages last year. According to The Wall Street Journal:
U.S. employers are boosting benefits—including bonuses and vacation time—at a faster pace than salaries, a move that gives them more flexibility to dial back that compensation if the economy turns sour.
The cost of benefits for private-sector employers rose 3% in June from a year earlier, while the cost of wages and salaries advanced 2.7%, the Labor Department said Tuesday.
The U.S. government is examining a tweet by Elon Musk about taking Tesla Inc. (NASDAQ: TSLA) private. According to The Wall Street Journal:
Tesla Inc. on Tuesday said the Justice Department has opened an investigation into the company following Chief Executive Elon Musk’s surprise tweet in August that he had secured funding to possibly take the electric-car maker private.
The company said that last month it received a “voluntary request for documents” from the Justice Department, generally the first step in a federal investigation of this kind. Tesla said it hasn’t received a subpoena, a request for testimony or any other formal request.
The United States will make Chinese media outlets register as foreign agents. According to The Wall Street Journal:
The Justice Department ordered two leading Chinese state-run media organizations to register as foreign agents, according to people familiar with the matter, as U.S. officials ramp up efforts to combat foreign influence operations and toughen their stance on a variety of China policies.
The DOJ in recent weeks told Xinhua News Agency and China Global Television Network—known as CGTN now and earlier as CCTV—to register under a previously obscure foreign lobbying law that gained prominence when it was used in the past year against associates of President Donald Trump, including Mr. Trump’s former campaign manager, Paul Manafort, the people said.
Facebook Inc. (NASDAQ: FB) may have helped companies discriminate against women in job listings. According to The New York Times
Facebook has been criticized in recent years over revelations that its technology allowed landlords to discriminate on the basis of race, and employers to discriminate on the basis of age. Now a group of job seekers is accusing Facebook of helping employers to exclude female candidates from recruiting campaigns.
The job seekers, in collaboration with the Communications Workers of America and the American Civil Liberties Union, filed charges with the federal Equal Employment Opportunity Commission on Tuesday against Facebook and nine employers.
China’s ownership of U.S. debt fell again. According to CNBC:
China’s holdings of U.S. Treasury bills, notes and bonds dropped to a six month low of $1.171 trillion in July, from $1.178 trillion in June.
The data is closely watched, since dumping Treasury securities is viewed as one way China could retaliate against the U.S. in an ongoing trade dispute, but bond strategists are skeptical China is really trying to send a message this way.
Papa John’s International Inc. (NASDAQ: PZZA) has a new ad campaign. According to CNNMoney:
Papa John’s new ad campaign makes a clear statement: The pizza chain is moving on without Papa John.
On Tuesday, the embattled pizza company released a new commercial featuring a diverse panel of franchisees and employees.
Copyright © Daniel Cullinane CPA.
BUILDER CONFIDENCE UP
SEPTEMBER NEWSLETTER 2
Several of the world’s largest tech companies want into the market for software that powers car navigation and entertainment. Google has just gone from wanting to do it to a partnership that will turn its aspirations into reality. It has come to an agreement with the auto partnership that includes Renault, Nissan and Mitsubishi.
The alliance is made up of three companies that have cross-ownership and, in part, share a management structure. In this case, the group will act as if it were one entity.
Google and the group’s management made the announcement:
Renault-Nissan-Mitsubishi and Google today announced a technology partnership to embed the Android operating system in vehicles sold by the world’s leading automotive alliance, providing intelligent infotainment and customer focused-applications across multiple models and brands, scheduled to start in 2021.
Under the technology partnership, vehicles sold by the Alliance members in many markets will utilize Android, the world’s most popular operating system, and will provide turn-by-turn navigation with Google Maps, access to a rich ecosystem of automotive apps on the Google Play Store and have the ability to answer calls and texts, control media, find information, and manage vehicle functions with voice using the built in Google Assistant.
The technology Google will contribute is not new. It has, however, found a home that will be in a large number of vehicles. These will be 12 autonomous and electric cars the alliance’s plans. Like all other major car company products, vehicles like these are the wave of the future.
The Google plan is similar to the one it has employed with wireless phones and other connected devices. If Android can become the operating system, its other software products will fall into place. In the world of cellular products, the effort has worked extremely well. Android holds a very high share of the market in the industry.
The three car company alliance is not as large as several other manufacturers. Google will need to vie with a great deal of competition to get into GM, Volkswagen and Toyota vehicles. But at least the new agreement is a start and a toehold for Android, which already rules the wireless industry.
While Most of Wall Street focuses on large and mega-cap stocks, as they provide a degree of safety and liquidity, many investors are limited in the number of shares they can buy. Many of the biggest public companies, especially the technology giants, trade from the low to mid hundreds, all the way up to over $1,000 per share. At those steep prices, it’s pretty hard to get any decent share count leverage.
Many investors, especially more aggressive traders, look at lower-priced stocks as a way to not only make some good money but to get a higher share count. That can really help the decision-making process, especially when you are on to a winner, as you can always sell half and keep half.
We screened the Merrill Lynch research database and found five Buy-rated stocks trading under the $10 level that could provide investors with some solid upside potential. While much better suited for aggressive accounts, they could prove exciting additions to portfolios looking for solid alpha potential.
This stock has been hit recently and offers investors a great entry point at current levels. AK Steel Holding Corp. (NYSE: AKS) is the sixth largest U.S. steelmaker and has the capacity to produce nearly 7 million tons of a total 110 million tons of U.S. steel capacity. The company produces flat-rolled carbon, stainless and electrical steel and tubular products in the United States and internationally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled and hot-rolled carbon steel products, as well as specialty stainless and electrical steels in sheet and strip forms.
The company also produces carbon and stainless steel that is finished into welded steel tubing, which is used in the automotive, large truck, industrial and construction markets, and it buys and sells steel and steel products, and other materials, and produces metallurgical coal from reserves in Pennsylvania.
Merrill Lynch has a $6 price target on the shares, and the Wall Street consensus target is $5.21. The stock traded on Friday at $4.35 a share.
This company may be way under the radar, but it has one of the best products imaginable in terms of name recognition. Arcos Dorados Holdings Inc. (NYSE: ARCO) is the world’s largest McDonald’s franchisee and Latin America’s leading quick-service restaurant operator. The company has exclusive rights to operate or subfranchise restaurants in over 20 countries in Latin America and the Caribbean. Brazil represents about half of revenues and nearly 60% of EBITDA.
Arcos Dorados was created in 2007 via the acquisition of McDonald’s assets in the region. The company completed a $1.4 billion initial public offering in April 2011. The company has posted solid results this year, with Mexico leading the way for momentum.
Merrill Lynch has a $10.50 price target, though the consensus target is $10.95. The shares traded on Friday at $6.20.ALSO READ: 4 Dividend Energy Stocks to Own as $80 Oil Could Happen This Fall
Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778