Buy These 2 Stocks to Play the Industrial Recovery
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Crude and industrial metals are mainly affected by major economies like the US and China. According to recent economic data, both the countries are witnessing a gradual uptick in their industrial outputs. However the industrial recovery is still in its early stages, which has not yet reflected in the stock prices of major industrial stocks. Balyasny Asset Management (BAM), a multi strategy, macro investing hedge fund, has a portfolio value exceeding $4.3 billion. According to recent filings, the fund has huge positions in Whiting Petroleum, Occidental Petroleum and Peabody Energy (holdings are mentioned below). Warren Buffett is also picking up industrial stocks and dumping consumer stocks. Though the mentioned stocks have declined significantly YTD, the steady industrial output recovery, makes two of these industry related stocks, interesting value plays.
Whiting Petroleum Corp (NYSE: WLL) – 1.54 million shares (approx.)
The company is one of the largest oil producers in the Bakken region, and looks fairly undervalued as its shares carry a PEG ratio of 0.95x and a forward P/E of 11.65x. On a quarterly basis, the company reported 17% higher revenues, but its net income was down by 23% mainly due to a surge in costs and expenses. With crude prices on the rise, oil E&P activities are also increasing. Due to this, the wages of workers and rentals of E&P equipment are also rising. However several reports claim that the demand for crude is rising faster than its production, which makes oil E&P companies good investments options.
There’s a buzz on the street that bigger players like Occidental Petroleum or State Oil might acquire Whiting Petroleum, but I believe that BP (NYSE: BP) could be another potential acquirer. BP has been selling off its non-core assets under a plan to raise $37 billion, and has a huge pile of cash reserves with strong cash flows to carry out the acquisition. Also since BP already has its presence in the Bakken Region and I believe that it could be looking to acquire Whiting Petroleum to expand in the region.
Either way, with or without BP, Whiting Petroleum still appears to be a lucrative acquisition target, and any potential acquisition news could also power up the stock.
Occidental Petroleum (NYSE: OXY) – 0.8 million shares (approx.)
Occidental Petroleum is a hydrocarbon company that mainly produces oil. Its major share of oil production comes from the US. Since the US economy is showing signs of recovery and its oil consumption is rising, Occidental Petroleum won’t have to search for international buyers to get a fair price for its production. This would save international transportation costs for the company, and hence add to its margins. Occidental Petroleum reported a 22% decline in earnings, owing to lower realized oil prices and increased expenditures, to boost production. However EPS stood at $1.70 which beat the Street’s estimated $1.63. Quarterly revenues also beat the Street's estimates, despite shrinking by 0.7%.
The shares of Occidental Petroleum yield 2.9% with a modest payout ratio of 28.56%. Also the debt/equity ratio equates to only 19% and the forward P/E comes stands at 10.19x.
Peabody Energy (NYSE: BTU)– 2.73million shares (approx.)
Peabody is one of the largest coal producers in the world, and its shares trade at a forward P/E of 12.53x with a PEG ratio of 0.57x, but that is not enough to buy the stock. The low prices of natural gas present the commodity as a cheap and environmental friendly alternative of coal. Countries like Germany and Japan aim to operate mainly on natural gas fired power plants by 2020. This doesn’t portray an optimistic picture for coal producers. YTD the shares of Peabody are down by 23.7%, and I believe that they will continue to tumble until steel production witnesses a significant ramp up in production.
In my opinion, investors should look to invest in Occidental Petroleum and Whiting Petroleum. Both the companies have been able to ramp up their production levels, by raising their rig utilization rates. Also the cash flow situation of these companies are expected to improve, as their "under-development projects" start operations beginning with 2013. Their shares appear undervalued, and with rising crude prices, their profitability is also expected to improve.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!