Wall Street Takes A Sleigh Ride; Five Oil Stocks To Buy Now, And A Natural Gas Play With 60 Percent Upside – With Oil Down 47 Percent – Barron’s Looks Ahead To 2015
Wow. What a week. Santa took Wall Street for a sleigh ride last week as stocks went on a very wild ride, ending the week up by 3 percent — “nearly erasing the previous week’s 3.5 percent loss. Vito Ricanelli, writing in this weekend’s Barron’s, notes that “anxiety diminished over the possible financial contagion from the collapsing ruble and oil prices; and, investors were encouraged by the Federal Reserve’s stance on interest rates.” I personally think it is too soon to pop the champagne corks on Russia and the implosion of the ruble; but, the market felt otherwise last week and the traditional Santa Claus rally in stocks commenced last week.
For the week, the DOW rose 524pts., or 3 percent to 17,804; while the S and P 500 gained 68, or 3.4 percent to 2,070; and the tech-heavy NASDAQ climbed 112pts., or 2.4 percent to 4,765. The Russell 2000 index of small-caps soared 3.8 percent, to1,195. For the year, the DOW is +7.41 percent, the S and P +12.03 percent, and the NASDAQ is +14.1 percent.
Mr. Ricanelli writes that “Wall Street began its ascent before Fed Chair Janet Yellen began her news conference Wednesday afternoon in the U.S. Investor concerns had mounted in recent weeks over the sharp plunges in both oil and the Russian ruble, which fell 16 percent in just two days last week.” “The rally shows that the market is pretty powerful, and you have to respect it,” says Richard Weeks, a Partner at Hightower Advisors. “The small-cap rise last week was healthy,” he added, but noted that “roiling currency and oil markets suggests some big forces have been unleashed, forces that will take a long time to reach equilibrium.”
“Investors should be wary of the volatile days in recent weeks,” Mr. Ricanelli wrote. “It’s hard to understand the race back into stocks…that just a few days ago –were deemed too expensive by investors.” “The remarkable aspect to the rally is that in the past 48 hours, the negative catalysts that sparked investor caution over the past couple of weeks, have not passed. They have arguably intensified,” said JonesTrading Chief Market Strategist Mike O’Rourke.
I think we could see a little more gain into the first week of January 2015, but, a correction and another noticeable pullback in stocks would not be shocking by mid-January 2015.
Five Oil Stocks To Buy Now; And A Natural Gas Play With 60 Percent Upside
Avi Salzman has a feature article in this weekend’s Barron’s (Dec. 22, 2014), singling out five oil stocks to buy now — in the wake of the 47 percent pullback in that sector these past weeks. Bottom Line Upfront: Barron’s Top 5 Oil Sector Picks; 1) Royal Dutch Shell, Chevron, Occidental, EOG, and Schlumberger.
“Oil prices have been cut in half,” Mr. Salzman writes — with oil falling to $56.52 cents a barrel on Friday, from a high of $107.26. The pain among oil producers has also been harsh,” he adds, “in an otherwise rising stock market. Shares of oil and gas producers are down 29 percent from the June high, according to Standard and Poor’s, while the S and P 500 has moved up 6 percent. Some highly leveraged producers could be in jeopardy if the price of crude stays low.”
“Big, integrated energy companies, such as Royal Dutch Shell (ticker: RDSA), Exxon Mobile (XOM), and Chevron (CVX), have held up far better; supported by their lush dividend yields, which now range from 3 percent and 6 percent.”
Mr. Salzman writes that “Barron’s surveyed the oil patch to find the most attractive investment opportunities among large producers and integrated oils, paying special attention to pristine balance sheets, and operating costs. They include: Royal Dutch Shell and Chevron, among the majors; Occidental Petroleum (OXY), and EOG Resources (EOG), and Schlumberger (SLB), the gold standard among oil-services companies, also make the cut, offering investors a rare chance to buy the high-quality stock on the cheap.”
Having said that, there are no guarantees in investing. Oppenheimer Commodity Analyst, Fadel Gheit, “warned against bottom-fishing amid the volatility, stating in an email to Barron’s, “At the current oil prices, ALL oil stocks are overvalued by historical metrics, as they are currently reflecting $70-$80 oil.” “With the smaller explorers and producers, you’re gambling on their survivability,” said Christian Ledoux, Senior Portfolio Manager, and Director of Equity Research at South Texas Money Management. “A lot of them won’t be able to explore profitably.”
“There is some reason for real optimism,” Mr. Salzman writes. “Some observers, even the ones who guide Barron’s cover story predicting the oil price plunge (Here Comes $75 Oil,” March 31) don’t expect oil to stay below $60 for very long, even if it temporarily slips below $40.” Citigroup’s Head of Global Commodity Research, Edward Morse, believes $90 will become the new ceiling for oil, whereas it had been the floor for many years.” “Others agree that the price will eventually rebound, with oil probably trading around $70-$75 over the next two years. Most shale projects, which account for about half of U.S. production, remain profitable when oil prices are $70; although there is wide variation by project,” Mr. Salzman notes. The article then goes on to discuss in more granularity the five top oil stocks to buy — in their opinion — in 2015. Since calling a bottom in anything related to stocks, commodities, currency, precious metals, etc. — leveraging in — over a period of weeks on pullbacks, isn’t a bad way to go; and, a strategy I intend to pursue.
A Natural Gas Play With 60 Percent Upside In 2015
Also in this weekend’s Barron’s, was an article with the title above by Jacqueline Doherty. Her bottom line upfront: “Rising gas prices could light a flame under Southwestern Energy’s deeply depressed shares, sending them sharply higher. A savvy acquisition, also could help.”
Ms. Doherty begins by noting, “Southwestern Energy shareholders have been hit by a double whammy: falling natural gas prices and the announcement of an acquisition that the company plans to fund partly with equity. Shares have fallen almost 40 percent spring, to a recent $31.” But, she argues, “these near-term negatives could be offset by more positive, long-term trends, including a rise in gas prices, spurred by growing demand. Wise deal-making and drilling have made Southwestern one of the industry’s lowest-cost producers, which means earnings could rise smartly, as the price of gas rebounds. Some analysts expect the shares to rally, as well, hitting $50 in the next 12 months.” Ann Miletti, a Senior Portfolio Manager at Wells Fargo Advantage Funds, put’s Southwestern’s private market value at $52 per share. She has a 12-month target price of $42.” There article goes on to describe the company’s pending acquisition of Chesapeake Energy (CHK) for $5.4B — which will expand the company’s presence in the Marcellus.”
I hope everyone has a Great Christmas and New Year. V/R, RCP