Investing

Jefferies Makes Key Changes to Top Energy Stocks in Franchise Picks Portfolio

Lee Jackson

Published: July 29, 2016 8:15 am

Last Updated: January 13, 2020 5:09 am

With earnings season winding down, many of the top firms we cover on Wall Street are making some changes to their list of high conviction stocks that they present to their institutional and high net worth clients. With 2016 returns still in the single-digit range, and some sectors that are very defensive starting to get very overbought, many of the top firms are shifting their sector balances away from what worked over the past year.

Despite the fact that energy has tumbled 20% from the highs posted in June, Jefferies remains bullish on the natural gas arena, and with good reason. Rising exports combined with unseasonably hot weather across the entire nation have kept demand solid, and many think it continues to stay that way. Range Resources Corp. (NYSE: RRC) is the new addition to the portfolio, while Gulfport Energy Corp. (NASDAQ: GPOR) has been cut.

Range Resources is a defensive natural gas stock that many on Wall Street like now and is added to the Franchise Picks portfolio. It operates as an independent natural gas, natural gas liquids (NGLs) and oil company. It engages in the exploration, development and acquisition of natural gas and oil properties.

The company holds interests in developed and undeveloped natural gas and oil leases in the Appalachian region of the United States. It owns and operates 4,462 net producing wells and approximately 905,000 net acres under lease in the Appalachian region, and 444 net producing wells and approximately 308,000 net acres under lease in the Texas Panhandle, as well as in the Anadarko Basin of western Oklahoma, the Nemaha Uplift of Northern Oklahoma and Kansas and the Permian Basin of West Texas and Mississippi.

Range Resources markets and sells natural gas to utilities, marketing and midstream companies and industrial users; NGLs to natural gas processors or users of NGLs; and oil and condensate to crude oil processors, transporters and refining and marketing companies. As of December 31, 2015, it had proved reserves of 9.9 trillion cubic feet of natural gas equivalents and will continue to pursue an organic growth strategy targeting high return, low-cost projects within its large inventory of low risk, development drilling opportunities.

Gulfport Energy is one of the favorites around Wall Street among the smaller more nimble companies, but it was removed from the Jefferies Franchise Picks portfolio. It is an independent oil and natural gas exploration and production company with its principal producing properties located in the Utica Shale of eastern Ohio and along the Louisiana Gulf Coast. In addition, Gulfport holds a sizable acreage position in the Alberta Oil Sands in Canada through its 24.9% interest in Grizzly Oil Sands.

Gulfport is a favorite of hedge fund managers. In fact, according to Insider Monkey, 36 hedge funds owned positions in the stock late last year. The shares hit some weakness on gas prices and a lower growth outlook, a move lower many believe is overdone and recent stock movement seems to have confirmed. With a multiple in line with peers and an expected ramp-up in production this year, the stock may be a great value at current levels, despite the recent big rally.

The Jefferies price target for Range Resources is $50. The Wall Street consensus price target is posted at $49.09. Shares closed Thursday at $40.77.

Gulfport Energy remains rated Buy, and Jefferies has a $36 price target, the same as the consensus target. The stock closed Thursday at $28.70.
In addition, here are the three top-yielding companies in the Jefferies Franchise Picks portfolio.

AbbVie

This is one of the top global pharmaceutical stocks picks across Wall Street, and it just posted solid quarterly results. AbbVie Inc. (NYSE: ABBV) is a global, research-based biopharmaceutical company formed in 2013 following separation from Abbott Laboratories. The company’s mission is to use its expertise, dedicated people and unique approach to innovation to develop and market advanced therapies that address some of the world’s most complex and serious diseases. AbbVie employs more than 26,000 people worldwide and markets medicines in more than 170 countries.

One of the biggest concerns with AbbVie is what eventually might happen with anti-inflammatory therapy Humira, which generated $14 billion in sales in fiscal 2015. That was the most any drug has recorded during a single year and represents a gigantic part of the company’s overall earnings. The problem is that biosimilars and generics are itching to enter the market with Amgen leading the charge, and some Wall Street analysts project that AbbVie may have a difficult time stopping that trend.

The patent board recently instituted Coherus BioSciences’ Inter Partes Review against the Humira ‘135 patent. The outcome of the review is expected in 12 months. While most analysts remain positive on Humira duration, the expected litigation uncertainty could continue to create an overhang on the stock.

AbbVie investors receive a 3.52% dividend. The Jefferies price target is $90, and the consensus target is $70.17 Shares closed Thursday at $64.72.

Boeing

This top aerospace industrial is still down over 10% since the beginning of the year. Boeing Co. (NYSE: BA), together with its subsidiaries, designs, develops, manufactures, sells, services and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems and services worldwide. The company operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support and Boeing Capital.

Top Wall Street analysts have increased confidence in continuing good demand, and they note that the company has made announcements in the past that support the thesis that the productivity and margins will continue to improve. 787 execution is good as the company works through the backlog, and cash flow looks to be strong with 787 deliveries and C-17 orders. Some Wall Street analysts also point to continued lower oil prices as a bullish indicator for the top carriers who are Boeing’s big customers.

Investors receive a 3.28% dividend. The $165 Jefferies price target is above the consensus target of $148.28 and the most recently closing share price of $133.01.

WestRock

Last summer saw the merger of two top packaging and container companies, and that could provide an outstanding opportunity for investors, as the stock has been absolutely mauled since the merger. WestRock Co. (NYSE: WRK) is the completed and merged entity that combined old Rock-Tenn and MeadWestvaco.

WestRock has become the second-largest U.S. packaging company, valued at $10.7 billion, trailing only International Paper and its market capitalization of just under $15 billion. WestRock is expected to generate net sales of $15.7 billion and adjusted EBITDA of $2.9 billion. This includes the impact of $300 million in estimated annual synergies, to be achieved over three years.

WestRock trades with a more than 10% free-cash-flow yield, and owing to demand resiliency and lower spending, the Jefferies team believes cash flow can hold up even in a tougher economic environment. They also think that the stock could continue its march off lows printed back in February if container-board prices hold, which they have for the most of the year.

Investors will receive a tempting 3.51% dividend. The Jefferies price target is $56. The consensus target is $70.56. Shares closed Thursday at $42.77.

While the stress from the Brexit vote is long gone, other factors like the political season and the global macro situation could keep investors nervous. Solid dividend-paying stocks make sense for the last half of this year, and the new addition to the list makes for a good energy holding.