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Jefferies Top 2018 Stock Picks for a Rising Inflation Economy
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Like the proverbial hibernating bear, inflation has been sleeping for years. The Great Recession and subsequent market implosion took interest rates to the lowest levels since the 1930s and 1950s. Wage growth and commodity price increases were next to impossible as everything came tumbling down. Since the dark days of 2008 and 2009, we have seen the economy slowly fight its way back.
After the election of Donald Trump in 2016, we have seen business, corporate and consumer optimism skyrocket, and after two straight quarters of 3% or so gross domestic product growth, the economy seems to be really heating up.
A new Jefferies report makes the case that it may be time to rotate to companies that are beneficiaries of rising inflation, and they explained why:
As we enter 2018, the positioning and sentiment around “inflation animal spirits” is much more tempered. However, our Equity Strategist and Global economist both believe 2018 will be a year marked by reflation. Sean Darby, the firms Global Equity Strategist sees a return of inflation on a mix of a synchronized global economy, pent-up investment demand, tight labor markets and loose monetary policy and a market where Industrials, Banks, Materials will lead indices higher. Ward McCarthy Jefferies Global Economist also believes Inflation acceleration is ahead on 3 key themes: Housing supply shock from natural disasters will drive the shelter component of consumer price index, rising prices of imported goods will get passed to the consumer and overall inflation will be boosted by supportive base effects.
Energy, steel, chemicals, and metals and mining all look like sectors that could benefit, and Jefferies thinks there are some outstanding reflation plays in 2018.
Integrated Oil
Chevron Corp. (NYSE: CVX) is a safer way for investors looking to stay or get long the energy sector. The integrated giant has big Permian Basin exposure and is in the Jefferies Franchise List portfolio. It is a U.S.-based integrated oil and gas company, with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. Shareholders receive an outstanding 3.61% dividend. The Wall Street consensus price target is $128.55. The shares closed Wednesday’s trading at $128.51 apiece.
Exploration and Production
Jefferies prefers Permian Basin companies.
Concho Resources Inc. (NYSE: CXO) is one of the top energy plays in the Permian Basin in West Texas and southeast New Mexico, and the stock is a Wall Street favorite. The independent oil and natural gas company is engaged in the acquisition, development and exploration of oil and natural gas properties. Its principal operating areas are located in the Permian, where it owns 600,000 net acres. The company has 624 MBoe of proven reserves, of which 57% is classified proved developed and 59% is oil. The Wall Street consensus target at $154.97, and shares closed Wednesday at $152.59.
Diamondback Energy Inc. (NASDAQ: FANG) is another top Permian Basin play for more aggressive accounts. This independent oil and natural gas company is headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves. Its activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations of the Permian Basin. The Wall Street consensus price target is $129.67. Shares closed most recently at $129.17.
RSP Permian Inc. (NYSE: RSPP) remains a top pick across Wall Street for Permian exposure. It is an independent oil and natural gas company focused on the acquisition, exploration, development and production of unconventional oil and associated liquids-rich natural gas reserves. The vast majority of the company’s acreage is located on large, contiguous acreage blocks in the core of the Midland Basin, a subbasin of the Permian. Historically a vertical producer, the company has been transitioning to horizontal drilling the past few years. The stock caught a string of upgrades from top Wall Street analysts last year, and many have pointed to the possibility that it may very well be a potential takeover candidate. The Wall Street consensus price objective is $46.29. The shares closed Wednesday at $41.48.
Oilfield Services
C&J Energy Services (NYSE: CJ) is well liked across Wall Street. This smaller cap play is a completion and production services company that provides well construction, well completions and well services to the oil and gas industry. It also manufactures, repairs and refurbishes equipment used in the oilfield services industry, and it operates in various North American onshore basins. The Completion Services segment includes the hydraulic fracturing services, cased-hole wireline services, coiled tubing services and other well stimulation services. Its Well Support Services segment includes rig services, fluid management services and other special well site services. The Wall Street consensus target price is $39.77. Shares closed Wednesday at $33.56.
24/7 Wall St.Metals and Mining
Freeport-McMoran Inc.’s (NYSE: FCX) stock has been absolutely crushed over the past five years and may indeed be a compelling value at current levels. This is the world’s largest publicly traded copper and moly producer, and the eighth largest gold producer. Its key operating and development assets are in Indonesia, North and South America and Africa. Highly leveraged toward copper mining, the company could be a big player in a scenario of rebuilding and repairing old and battered projects and would clearly benefit from stronger demand and higher prices for industrial commodities. The posted consensus price target is $16.60. Shares closed above that level on Wednesday at $19.47.
Chemicals
Praxair Inc. (NYSE: PX) could be a very timely addition as an inflation play for 2018. This company offers atmospheric gases, such as oxygen, nitrogen, argon and rare gases, and it process gases comprising carbon dioxide, helium, hydrogen, electronic gases, specialty gases and acetylene. It also designs, engineers and builds equipment that produces industrial gases, as well as manufactures precious metal and ceramic sputtering targets used primarily in the production of semiconductors. In addition, Praxair supplies wear-resistant and high-temperature corrosion-resistant metallic and ceramic coatings and powders to the aircraft, energy, printing, primary metals, petrochemical, textile and other industries. Its consensus price objective is $160.12. Shares closed Wednesday at $157.50.
Steel
Shares of AK Steel Holding Corp. (NYSE: AKS) rallied recently but still offer investors a solid entry point at current levels. The sixth largest U.S. steelmaker 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 globally. It produces flat-rolled value-added carbon steels, including coated, cold-rolled, and hot-rolled carbon steel products; and specialty stainless and electrical steels in sheet and strip forms. It 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; buys and sells steel and steel products and other materials; and produces metallurgical coal from reserves in Pennsylvania. The consensus price objective is $5.90, but shares closed Wednesday at $6.34.
United States Steel Corp. (NYSE: X) remains a favorite across Wall Street. Its U.S. Steel Europe segment provides slabs, sheets, strip mill plates, tin mill products, and spiral welded pipes, as well as heating radiators and refractory ceramic materials. This segment serves customers in the construction, service center, conversion, container, transportation, appliance and electrical, oil, gas and petrochemical markets. The Tubular Products segment offers seamless and electric resistance welded steel casing and tubing, as well as standard and line pipe and mechanical tubing products primarily to customers in the oil, gas, and petrochemical markets. Shareholders receive a 0.53% dividend. The consensus target price is $33.69, and shares closed Wednesday at $37.49.
24/7 Wall St.Nine top picks for investors looking to play a rising inflation scenario in 2018. All these companies offer exposure to the reflation potential, as well as reasonable valuations, considering their somewhat out-of-favor status.
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