Chicago Bridge & Iron Company N.V. (CBI) is levered to the growing needs for energy transportation infrastructure in North America, and the company has been further strengthening its position in the LNG and petrochemical segments through acquisitions, says Robert F. Norfleet, Managing Director and Senior Equity Research Analyst at BB&T Capital Markets.
“When I look across our spectrum, I see Chicago Bridge & Iron as being very well-positioned to capitalize not only on the emerging market growth in oil and gas, as they have significant assets outside North America, but they have a very strong position in North America both in LNG and in petrochemical. In addition, they just acquired The Shaw Group, another large E&C company, that enables them to basically have enough resource capacity to meet the growing demand for petrochemical engineering and construction spending in North America over the next few years,” Norfleet said.
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Norfleet says CBI is a top-of-mind builder in the minds of investors. The growth prospects of North American petrochemical production and processing, and the lacking infrastructure to support much of this activity, points investors to engineering and construction names like this.
“Overall, we think that Chicago Bridge & Iron is very well-positioned both internationally and in North America to basically participate in the high growth that we expect to take place over the next few years. Further, they have been a leading engineering and construction company for the last few years, and I think the acquisition of The Shaw Group put them even more in the limelight as it relates to the engineering and construction group. They are a well-known entity among investors, especially given their recent acquisition of another fairly large and prevalent engineering and construction company,” Norfleet said.
Peabody Energy Corporation (BTU) is poised to improve earnings next year as the outlook for metallurgical coal rebounds from the current lows, driven in large part by Chinese demand for this coal producer’s Australian reserves, says David Beard, Analyst at IBERIA Capital Partners.
“Peabody is the go-to name. Given that we feel we are at or even past the bottom, we want to go with the leader in the group, and that’s Peabody. The stock is not much above book value, just tends to be a floor the stock of just under $18 per share. The leverage in EBITDA and EPS relative to coking coal is quite substantial. We feel 2014 earnings should improve dramatically, pushing the stock towards our $35 per share price target,” Beard said.
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Beard says China has become a net importer of metallurgical coal for its continuing production of steel, given their growing metal needs and depleting coal reserves. BTU, with its mines located in Australia, has a geographical advantage over peers when delivering coal to its neighbor in the Pacific.
“China has gone from an exporter of coking coal as recently as 2007 to an importer of around 50 million tons today. They also consume a huge amount of coking coal from internally mined production, so I think longer term, people are looking at a couple of different things: Will China import more as their internal production drops even if they don’t produce that much more steel? Their mines are depleting, and thus they need to import more coking coal,” Beard said.
Wells Fargo & Co (WFC) will see lowered warrant prices should its dividend exceed approximately $1.36, and its long-dated options give shareholders protection until 2018, says Dan Sheehan, Managing Partner of Sheehan Associates LP and Credit River Partners, LLP.
“It is rare that you get to buy a long-dated option on any publicly traded security. For the most part, I don’t think I can price stock options if they have an expiration date that is a month or two or even a year away. But these don’t expire until 2018, and they’re also protected in terms of a price based on the dividend at the time that they were issued,” Sheehan said.
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Sheehan likes the WFC investment because if the company’s dividend goes above around $1.36, the price of the warrants will be lowered, offering upside and the ability for WFC to weather short-term volatility.
“Wells hasn’t gotten up to that point yet, but if their dividend goes above, I think it’s $1.36 or something like that, anything above that lowers the price of the warrant. Something like that gives you upside; you can value it because it’s far enough out into the future that the short-term volatility sort of gets averaged out. It is a good business that I can understand, and this gives me a much less risky way to get some leverage on what I think the business is worth,” Sheehan said.
Federated Investors (FII) faces headwinds due to continued low interest rates and headline risk from SEC policy change proposals, leading Jason Weyeneth, Lead Analyst at Sterne Agee & Leach, Inc., to rate the stock an “underperform” among investment management products and services.
“As a money market fund provider with interest rates as low as they are, Federated has to waive a sizable portion of fees in order to keep the returns above zero for their money market fund investors, and it seems pretty clear from what’s going on from a macro standpoint and from Fed commentary that short-term interest rates are going to remain low for the foreseeable future, which will drive continued earnings pressure for Federated of roughly $0.10 to $0.12 per quarter, so it’s a material earnings headwind,” Weyeneth said.
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Weyeneth says the headline risk stemming from the proposal of reform implementation may have a negative impact on the stock. He says he doesn’t think the SEC will implement reforms that will have a negative impact on FII‘s business model, but the headlines are enough to pose risk and repel some investors.
“I think we’re certainly going to see a proposal of some sort from the SEC, which could include aspects that would appear to be detrimental to their business model if passed. I don’t think they ultimately get passed, but I don’t want to own the stock in the face of what’s likely to be some negative regulatory headlines later in the year,” Weyeneth said.
Crosstex Energy, L.P. (XTEX)‘s acquisition of Clearfield Energy, Inc. places the company at the front end of development in the Utica shale and and also gives XTEX access to Marcellus shale activity, reflecting the company’s strategy of building off of a platform in a growing area or shale, says Michael J. Garberding, Executive Vice President and CFO of Crosstex Energy, L.P.
“The key to the Clearfield acquisition is that it puts us on the front end of the development of the Utica shale, as well as gives us access to Marcellus shale activity. Now we have access to pipelines, barges rails and trucks in the region so we’re able to provide producers with the optionality to move the products to market quickly, because we have the right assets, the infrastructure and the employees in place,” Garberding said.
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Having the infrastructure will then lead to additional opportunities for new investments and the potential to use their existing assets to create a broader footprint in the region and play a key role in moving crude and condensate from the Utica shale, Garberding says.
“Our plan in the Utica and Marcellus shales is similar to how we built out assets in the Barnett shale in North Texas or in the Haynesville shale and other formations in Louisiana where we took an original platform and built off of it…We believe long term that the Utica will be a great production opportunity where we will play a key role in moving crude and condensate for our customers,” Garberding said.
Waddell & Reed Financial (WDR) is expected to benefit from the flow of capital from fixed income into equities thanks to its well-known Ivy Asset Fund, and the financial firm currently trades at a compelling valuation with growth expected over the next five to 10 years, says Macrae Sykes, Research Analyst at Gabelli & Company, Inc.
“I highlight the Ivy Asset Fund, Waddell & Reed’s flagship product, which had a strong year in 2012. And I think because of its place in the global allocation space, it is likely to remain competitive on a relative basis for investment performance, because a lot of its competitors rely on fixed income returns to generate performance due to the nature of their asset-allocation parameters,” Sykes said.
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Sykes says WDR has a strong management team and a positive operating margin, and the company is further attractive to investors thanks to its dividend yield.
“Waddell & Reed we’ve mentioned it before — this should be a beneficiary of this movement to equities, because it has a strong position with the Ivy Asset Fund with its brand name and terrific firm distribution. It’s a very good management team led by Hank Herrmann. The company should also benefit from increased operating margins. Despite the share price increase year to date, it still has a compelling valuation. We think this company can continue to grow over the next five to 10 years. It also has a nice current return in terms of the dividend and just a very well-aligned institution,” Sykes said.
Goldman Sachs Group (GS) has one the highest revenue exposure from investment banking, making the financial institution particularly sensitive to the current early stages of an economic, albeit slow, rebound during this period of low interest rates, says Brad Hintz, Equity Research Analyst at Sanford C. Bernstein & Co., LLC.
“Equity underwriting volumes are increasing, and financial sponsor advisory activity appears to be increasing. Among our coverage group, Goldman Sachs has the highest percentage of revenue coming from investment banking, and therefore its earnings are most sensitive to a rebound of banking. We have an ‘outperform’ rating on Goldman,” Hintz said.
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Hintz says an economic rebound would increase capita flows into equities in several steps, from allowing banks to profit more, moving capital from bonds to equities, and also by encouraging retail investors to return to stocks.
“In trading, a rebounding economy tends to boost equity indices and volumes and increasing new money flows into equity products. And a recovering economy eventually leads to rising interest rates, which supports the greater hedging activity and allows the low-cost deposit bases of the banks more profitable. But as rates rise and yield curves flatten, fixed income trading revenues slow, trading activity moves to the short end of the curve and principal transactions revenue weakens. And finally, as employment in the broader economy grows, the retail brokerage or wealth management sector rebounds as retail investors return to the equity market,” Hintz said.
Enterprise Products Partners L.P. (EPD) is a midstream mega cap every investor of any risk tolerance should own, as EPD is able to perform better than a small-cap name in a state of enhanced market volatility, says Ethan Bellamy, Senior Analyst at Robert W. Baird & Co.
“Within midstream you have mega caps like Enterprise Products (EPD), which is a fantastically well-run partnership. It’s a name that everyone of any risk tolerance can and probably should own…EPD and a small-cap name are going to perform very differently if we see enhanced volatility, so while over the long term we think that some of the best risk/reward propositions are in the small caps, tactically if we see volatility spike up, those small-cap names are going to get disproportionately hurt,” Bellamy said.
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Bellamy advises investors to be conscientious about the balance between small- and large-cap names in a portfolio, and to tune a portfolio to real risk tolerance in order to play out any market volatility.
“Those small-cap names that aren’t investment-grade, that aren’t quite as well diversified and don’t have the same amount of liquidity, are going to get hurt a lot worse in a correction. And frankly, at the bottom they’re going to produce much stronger returns for an investor diving in once we see volatility come back,” Bellamy said.
T. Rowe Price Group (TROW) provides investment products directly to consumers, outperforming peers in this industry through the combination of performance and product strategy and the quick-paced response to client demand, says Lucas Montgomery, Research Analyst at Sanford C. Bernstein & Co., LLC.
“You don’t see a lot of persistence in performance among active managers, again which is indicative of the level of competition in that market. But there are some firms that do it very well. T. Rowe Price is one that has done it very well for a long period of time. They are live by the sword, die by the sword. They sell direct to retail customers that could be described as very performance-sensitive and therefore very fee-sensitive,” Montgomery said.
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T. Rowe‘s funds have a better performance than the average fund. Montgomery says funds can be seen as a combination of portfolio performance and distribution rights, and he says that in cases with managers with good distribution the portfolio mediocrity can sometimes be overlook.
“If you look across T. Rowe‘s platform, relative to the total number of funds they sell they have a fairly high proportion of four- and five-star funds as defined by Morningstar, so better-than-average performance platform. But that’s not the only competitive advantage one can have, and it’s very difficult to do,” Montgomery said.
