Those who have ridden the technology tiger this year have made a ton of money, and there is every reason to believe that going forward the sector will continue to be a leader. Yet, as we saw with the massive splits for Tesla and Apple, investors took many of the extra shares and sold stock. Why? They had huge profits and the chance to reset, or even move to the sidelines with a wad of cash.
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So where is the potential upside for 2021? It makes sense to view the balance of this year with a somewhat jaundiced eye, as almost regardless who wins the presidential election, there will be a tsunami of disappointment, angst and hand-wringing.
In a new BofA Securities research report, the analysts looked at relative valuation for each sector with an eye toward price-to-book figures. The financial and energy sectors come in with big upside potential based on historical average price-to-book ratios. Does that mean they will come raging back next year? No, but in a pricey market with the potential for extreme volatility in and around the election, taking a look at some of the top companies may make sense for long-term growth investors.
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We screened the BofA Securities research universe for stocks rated Buy that have solid risk profiles in the financial and energy sectors. These five make sense now for investors starting to look to make some changes away from momentum stocks.
Apache
This has long been considered an industry leader but its stock has been battered. Apache Corp. (NYSE: APA | APA Price Prediction) is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids (NGLs). The company has operations in onshore assets located in the Permian and Midcontinent/Gulf Coast onshore regions, and offshore assets situated in the Gulf of Mexico region. It also holds onshore assets in Egypt’s Western desert and offshore assets in the North Sea region, including the United Kingdom.
Apache also has an offshore exploration program in Suriname. As of December 31, 2019, it had total estimated proved reserves of 551 million barrels of crude oil, 186 million barrels of NGLs, and 1.6 trillion cubic feet of natural gas. The company remains an acquirer/exploiter/explorer, fiscally conservative company that has grown its reserves and production consistently via acquisitions and organic projects.
Apache posted a solid second quarter, and the analysts said this:
A solid second quarter sees costs and capex trending down and implies a second half of 2020 cash breakeven at $30 a barrel with free cash at the current strip. But overshadowing the quarter was an announced 3rd exploration success at Kwaskwasi further linking Apache’s story to Suriname. Resource scale suggests that story is just getting started but with Suriname still poorly reflected in the company’s share price.
The company pays just a 0.65% dividend. BofA Securities has a huge $26 price target on the shares, well above the Wall Street consensus target of $17.16. Apache stock closed Thursday’s trading at $12.42 a share.
Citigroup
Shares of this top bank have traded at some of the lowest levels since 2016. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.
Trading at a still very cheap 7.2 times estimated 2020 earnings, this company looks very reasonable in what remains a volatile stock market and in a sector that has dramatically lagged.
Note that there is the potential for a consent order to be placed against the bank as federal regulators potentially weigh taking actions against Citigroup over deficiencies in the bank’s risk and control functions. That has weighed heavily on shares, perhaps offering even more opportunity.
The analyst noted this about the current situation:
[A] Wall Street Journal article, if accurate, would certainly reduce the luster of Jane Fraser’s recent appointment to CEO, as this could imply more “clean up” tasks on her plate vs. “growth” tasks. At 67% of tangible book value and the likelihood of staying profitable (i.e., not eroding book value), Citigroup’s shares appear to be pricing in a lot of bad news. However, we continue to think that at current levels, there remains more upside than downside, given the potential to improve returns to 10-12% medium-term, and to close the gap to peers in the mid-teens long-term as Ms. Fraser and new leadership tap the company’s growth potential.
The dividend yield is 4.48%. The BofA Securities price target is $74, and the consensus target is $69.02. Citigroup stock closed at $45.53 on Thursday.
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Hess
This top mid/large-cap pick is still down a stunning 35% this year, and the company could be a takeover target. Hess Corp. (NYSE: HES) is an exploration and production company that develops, produces, purchases, transports and sells crude oil, NGLs and natural gas. It primarily operates in the United States, Denmark, Equatorial Guinea, the Joint Development Area of Malaysia/Thailand, Malaysia and Norway.
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The company continues to make solid discoveries globally, and the analysts noted this:
2 more discoveries at Redtail & Yellowtail 2 looked passed over by the market – but incremental exploration success has value. In our view, it offers low cost tieback opportunities. Including just two at Liza 2 and Payara and our price objective moves up. At current levels, value dislocation looks unsustainable with Hess having just scratched the surface of exploration potential.
Holders of Hess stock receive a 2.25% dividend. The stunning $70 BofA price target compares to the $58.27 consensus figure and the most recent close at $44.25.
Pioneer Natural Resources
Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.
Pioneer is a huge player in the Permian Basin and in the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. With updated 2020 and 2021 hedging adding $1.2 billion to cash flow estimates over next two years, a new $900 million credit facility further enhances liquidity. In addition, the Gulf coast marketing makes Pioneer less exposed to widening Midland differentials.
Top Wall Street analysts feel that by owning Pioneer, investors have access to a Permian growth and a free-cash-flow story, but with better asset level and corporate level operating/financial metrics. Some also feel that Pioneer could have an improved dividend if the cycle improves given the introduction of its variable dividend framework.
Investors receive a 2.26% dividend. The BofA Securities price target is $122. The consensus figure is higher at $132.67, but Pioneer stock closed most recently at $97.08.
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SVB Financial
This boutique financial services firm may be off many investors’ radar screens. SVB Financial Group (NASDAQ: SIVB) is a financial holding company that serves companies in the technology, life science, venture capital, private equity and premium wine industries, offering diversified financial services such as commercial, investment, international and private banking. Headquartered in Santa Clara, California, the company operates through offices in the United States and international operations in China, India, Israel and the United Kingdom.
Wall Street analysts have raised the third-quarter earnings estimate to $4.04 per share up from the previous consensus forecast of $3.97 per share, as well as the full-year estimate for 2020 to $14.46 per share from the previous $14.38 per share.
BofA Securities has set a $275 price target. The consensus target is $250.13, and Thursday’s closing print for SVB Financial stock was $245.91.
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These five stocks are about as far away from momentum as you can get, and now it may not be a bad idea to give them all a hard look. Financials have been crushed, and here you have a leading money center bank and a boutique stalwart. Oil was up well over 7% this week on the shut-ins in the Gulf of Mexico and some supply improvements. The three energy ideas are some of the best names in the sector with little current downside.
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