Yes I know, the market is on fire right now. It’s tough to look at this market and think that there are any bargains out there waiting to be scooped up. But really there are hundreds, you just have to know where to look. Our Zacks Rank helps us find companies with great earnings stories that have analysts changing their earnings targets on. So if we apply the Zacks Rank to a segment of the market that we think is growing on its own then find the best companies in that group and add on good charts, we should be in business.
What are some of the major economic themes taking place right now? The environment is becoming an increasing concern worldwide. With a harsh winter behind us, sea levels and average temps are rising. Now I’m not going to start hugging trees over here on you, but I don’t think it’s too crazy to say that the world is becoming more conscious of pollution.
Another theme is the availability of cheap money internationally. World central banks have been flooding the market with currency, allowing depreciation on a grand scale. All this stimulus and accommodation will eventually come back to roost. Eventually there will be inflationary pressure one day I promise.
Well there is a way to invest in both of these themes. The auto industry has been cutting down on pollution from automobiles through the use of catalytic converters on cars and commodity prices should rise in an inflationary environment. How about investing in a company that provides the commodity that is used in making catalytic converters? That’s exactly what you have with Stillwater Mining Company (SWC-Free Report).
Stillwater is a Zacks Rank #1 (Strong Buy) in the mining industry that ranks in the top 38% of our Zacks Industry Rank. Stillwater is the leading low-cost platinum group metals (PGMs) producer in North America. The platinum group metals include palladium and platinum. Most of the demand for palladium in the world, 73%, comes from the manufacture of catalytic converters for automobiles.
Stillwater’s reserves are split roughly 80% palladium and 20% platinum. In 2013, SWC produced 524,000 ounces of PGMs from its Montana Mines segment and still has over 22 million proven and probable PGM ore reserves. And you don’t have to worry about SWC running out of cash anytime soon as their liquidity includes $474 million in cash and cash equivalents and an undrawn credit facility of $80 million.
Analysts are keen on the stock as well. Two analysts have raised current year and next year estimates which have help raise consensus from 45 cents to 63 cents for the current year and from 71 cents to 85 cents for next year. This comes on the heels of SWC surprising three quarters in a row, with the most recent beat nearly doubling the 8 cents per share consensus.
The technical picture is a bullish one as well for SWC. It has been in an uptrend since November, trading from just over $10 to $18 before selling off earlier this month. The sell off from $18 down to $16.23 wasn’t enough to derail SWC. Now the stock trades near $17 and has pulled back to its 25 day moving average shifted by 5 days (25x5). The 25x5 is also positively sloped, implying a bullish bias. The stochastics have recently show a bullish cross from an oversold condition as well. All of these factors are bullish for Stillwater.
Bottom Line
SWC is a company well positioned inside of a growth industry that should benefit from a few key worldwide economic trends that are developing. This, backed by the power of the Zacks Rank, make it my Bull of the Day.
It’s probably pretty obvious that I’m an investor. And as an investor I look to put money into a situation where it can work for me, not against me. I’m a firm believer that you should invest in assets that appreciate and lease anything that depreciates. That’s why I don’t buy new cars but I’ve been drooling over a 1970 Mach I for the last several years. It’s also why I don’t go to the mall and buy silly things that are going to be worthless in the future. Okay, so for the most part I don’t do that. But sometimes at Christmas or a birthday I get bamboozeled. A significant other or family member will ask for something ridiculous for a gift like a $500 purse. A $500 purse after they already own three $500 purses.
Okay, rant over. It’s not only that I can’t see the logic in purchasing another $500 purse, but I can’t see the logic in buying the company that makes them. And it’s not because I have some personal vendetta against the purses, I just listen to what the analysts have done with their earnings estimates. In the case of Coach (COH-Free Report), it’s enough to make them my Bear of the Day.
You don’t have to trust me on this call. You can ask one of the 21 analysts that have lowered their estimates over the last 60 days for the current year or one of the 20 that did the same for next year’s numbers. The magnitude of the cut is substantial as well. The year’s number has dropped from $3.17 down to $3.04 but next year’s consensus fell from $3.44 all the way to $2.09. You read that right, analysts believe that earnings will fall nearly 33% next year. Not the direction you want to the earnings trend to be. This is a big reason why Coach is a Zacks Rank #5 (Strong Sell) in an industry that ranks in the bottom 43% of our Zacks Industry Rank.
The chart looks about as healthy as a Charlie Sheen EKG. Or mine for that matter when I’m at the counter with my credit card out. Let’s start by flashing back to July 2013. The luxury brand was trading above $60. For a few months it was a slow chop downwards. Late summer and early fall the stock hovered in the mid $50s, dropped harshly, then ran back up near $58. That last gasp for air was the last chance to jump ship. The market slapped COH down hard to start the year. Coach tried to hold up again near $50 until late April when it all fell apart.
How nasty is it? $34, nearly half of where it was less than a year ago. The 25 day moving average shifted by 5 days (25x5) which I use to help determine trend is light years away at $40.52. The last time COH traded above the 25x5 was late April. Just a week ago COH was above $40 but it’s just been getting worse since then. Put mildly, there are more attractive spaces in this market right now. Luxury retail brands losing favor in the market are not the place to be.
Bottom Line
There are much better investment ideas in this market than Coach right now. The downward revisions for earnings have been beating the stock into submission. Within the same industry investors should check out Zacks Rank #1 (Strong Buy) Vince Holding Corp (VNCE-Free Report).
Additional content:
3 Large-Cap Energy Stocks to Beat Volatility
A price jump and small cap companies do not always go hand in hand, though psychologically they do. This is because a small change in the price of these low-priced stocks makes the percentage gain significant. But lack of key growth ingredients is always a concern for these stocks.
Large cap stocks, on the other hand, look like slow moving giants that generally do not promise much growth because of their ‘been-there-done-that’ attitude. These stocks have been in the industry for a long time, seen ups and downs, have grown and are sitting sturdily atop an industry. But it is this very experience and niche position that makes large-cap stocks the blue-eyed boys of their respective industries. Things take an interesting turn when these giants come with fat growth opportunities as well.
But before we delve into discovering some such biggies from the energy sector, a better understanding of their advantages over the smaller ones is necessary.
Large Cap Benefits
Most of the large-cap companies have operations all around the globe and are thus much less susceptible to geo-political risks than the smaller firms. Moreover, the financial strength allows them to explore potential growth regions, as is evident from the fact that many biggies are now turning toward the emerging markets.
Another important aspect of a company is its cash generation ability and the strength of its balance sheet. Large-cap companies have generally been in the industry for a long time and now sit on a large resource base which offers a steady stream of cash flow.
Further, the fact that most of these large-caps have substantial institutional ownership is the icing on the cake. It is often better to follow the footsteps of institutional investors because a lot of research goes behind their choices.
Why the Energy Sector Deserves Attention Now
The near term outlook for oil remains positive given the commodity’s constrained supply picture. In particular, while the Western economies exhibit sluggish growth prospects in terms of demand, global oil consumption is expected to get a boost from sustained strength in China, which continues to expand at a healthy rate despite some moderation. Therefore, oil prices, though volatile, are expected to remain strong, enabling oil biggies to rake in cash.
However, greater focus remains on natural gas. We see a solid long-term future for the commodity as demand soars, spurred by its cost effectiveness and abundant supply in North America. In fact, natural gas is expected to overtake coal to become the largest contributor of electric power generation in the U.S. Continued growth in shale gas production and technological advancements like horizontal drilling and hydraulic fracturing should support this demand.
3 Top Large-Cap Energy Picks
We have handpicked three energy stocks with a market capitalization of over $10 billion, EPS growth of over 5% in the past 5 years, a projected growth of over 10% in the next 5-year period and current year EPS growth expectation of over 30%. These stocks have been witnessing upward estimate revisions as well and thus hold a favorable Zacks Rank #2 (Buy).
Based in Houston, TX, EOG Resources is a major independent oil and gas exploration and production (E&P) company, with operations in the U.S., Canada, offshore Trinidad, and the U.K. North Sea. The company has historically concentrated on natural gas but is now gradually increasing its stake in liquid-linked assets.
The Irving, TX-based company is an independent E&P company with operations in the Spraberry Field in West Texas and the Eagle Ford in Southern Texas. The company has been increasing acreage over the past few years. Pioneer Natural Resources is expected to continue its robust production growth and drill to profits in the long term.
Headquartered in Pittsburgh, PA, EQT Corp. is an integrated energy company that focuses on natural gas supply activities in the Appalachian area, including production and gathering, natural gas distribution and transmission as well as energy efficiency solutions. Increased drilling and investment in the deeper Marcellus gas shale play will be its key growth driver.
Market Cap.: 16.34B
Past 5-Yr. Growth: 5.7%
Next 5-Yr. Growth Projection: 19.9%
Current Year Growth Projection: 71.3%
Bottom Line
The inherent volatility in the sector simply cannot be ignored. The Russia-Ukraine clash, current slowdown of the Chinese economy and less-than-expected growth in Japan are only adding to the looming uncertainty that threatens these companies. More recently, oil prices flared up on the news of the Iraqi insurgency.
It’s hard for the energy sector to emerge from this nagging volatility. But large cap stocks are somewhat able to come out of this stickiness thanks to their global and diversified operations.
Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.
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