by Jeffrey Saut, Chief Investment Strategist, Raymond James
Two weeks ago I said, âWhile the intermediate/long-term internal stock market energy remains fully charged for a move higher, the marketâs short-term energy still needs some time to rebuild. This probably means another week, or two, of consolidation and/or attempts to sell stocks down before we begin another leg to the upside. Even so, I donât think any selling will gain much downside traction, implying the zone between the S&P 500âs 50-day moving average (DMA) at 1320 and the 1340 level should provide support for stocks.â Well, itâs now two weeks later and from my lips to Godâs ears because the S&P 500 (SPX/1333.27) did exactly that last week when it tested its 50-DMA and proceeded to bounce above 1340, which I thought would confirm the successful test of the 1320 level. Alas, that wasnât meant to be as once again Fridayâs Fade (-10.33 SPX) left the SPX right in the middle of my 1320 â 1340 support zone. Still, the action has not negated the âcallâ for a move above 1400 by the end of June provided the SPX doesnât decisively violate the 50-DMA to the downside. Accordingly, I thought this morning I would revisit a few of my favorite investment ideas.
To begin, even though I continue to believe commodities are likely on âsummer vacationâ before they resume their secular bull market, I continue to like a number of special situations in the energy space. For example, Williams Company (WMB/$30.76/Outperform) reported a solid 1Q11 quarter boosted by the strong natural gas liquids (NGL) supply/demand fundamentals. Our bullish thesis on Williams is supported by three main points: (1) we believe the companyâs E&P assets will garner a higher valuation in the market place as a stand-alone entity when the company splits itself into two parts; (2) we believe the market is undervaluing Williamsâ ownership of the Williams Partner GP, and (3) we expect strong growth from the Canadian midstream assets.
Next is Clayton Williams (CWEI/$72.12/Outperform), where we sold one-third of our position around $100 last March. Since then the shares have retreated, yet the fundamentals continue to afford an attractive risk/reward ratio for investors despite last weekâs reduced guidance. To wit, while the guidance update dials back the near-term outlook of the stock slightly, the company is not alone in facing the rising service costs in the industry. What does set Clayton Williams apart from the rest of the group is its highly oil-weighted production profile (74%), growing position in high-return oil plays (namely the Permian and Delaware Basin), and cheap valuation. Raymond James Analyst John Freeman last week reiterated his Outperform rating on Clayton Williams and stated that he viewed any pressure in the stock as a buying opportunity.
Then there is LINN Energy (LINE/$38.56/Strong Buy), which remains the top pick in the upstream MLP space for our analyst Darren Horowitz. The partnership reported a solid 1Q11, but perhaps more importantly guided to a very strong 2011 with an expected average distribution coverage ratio of 1.4x for the remaining quarters. In 2011, we are forecasting LINN will achieve greater than 35% EBITDA growth and 5% distribution growth. After updating for the acquisition and 1Q11 results, we increased our 2011/ 2012 EBITDA forecast by 3%/1%.
EV Energy Partners (EVEP/$54.04/Strong Buy) is also on our âhit listâ given its rating upgrade last week following the stock price plunge. EVEPâs stock price traded down roughly 8% last Tuesday on no fundamental news. After discussions with management, our analyst views the recent weakness in the stock as likely short-term profit taking and not a reflection of the company`s fundamentals or growth expectations. Moreover, EVEP is optimistic that we will learn about Utica drilling results later this summer. Keep in mind that EVEP owns 150,000 net acres and 80,000 royalty net acres in this emerging shale play. Assuming that the partnership is able to monetize its 150,000 net working interest acreage for $5,000 per acre, and acquire new acreage for a 6.5x multiple of EBITDA, we forecast that such a transaction would boost EVEP`s distributable cash flow (DCF) by $2.70/unit, or a 88% increase to our 2011 DCF forecast. Further, the CEO bought stock last week in the open market, which supports our thesis that the stock price pull-back was not driven by any pending operational/fundamental news. Said weakness provides a compelling entry point given our thesis that the decline in the stock price was unwarranted and that EVEP`s stock price is going to be significantly higher in the next 12 months.
Yet our favorites list is not just concentrated in the energy space. Indeed, after avoiding banks for over 10 years, we warmed to some of the banks late last year. However, that âwarmthâ was not centered on the marquee names, but rather names like IBERIABANK (IBKC/$58.81/Strong Buy). To be sure, our bank analyst maintains his Strong Buy rating on IBKC shares following solid 1Q11 results that exceeded consensus expectations. While a fair amount of noise from its five FDIC-assisted acquisitions and two traditional acquisitions expected to close in 2Q11 will continue to impact operating results, we believe the company is beginning to harvest the investments it has made in its franchise over the past few years. Indeed, managementâs laser focus on prudent, profitable expansion will drive continued improvement in earnings power, particularly as excess capital and liquidity are fully deployed.
We also like the technology sector despite its recent underperformance. One of our more controversial picks has been Equinix (EQIX/$100.76/Strong Buy). Recall, we recommended EQIX after its collapse last October. Recently, Equinix beat earnings estimates and raised guidance. We continue to see favorable drivers for the data center space and strong top-line growth. We view pricing concerns the market has had regarding data centers as being overdone and still view Equinix as our top idea given its superior revenue growth, and its dominant position in the colocation space.
Additionally, some 13Fs were released last week showing the biggest increases and decreases in major institutional holdings. Four of the biggest increases from our research universe were: Chevron (CVX/$102.57/Outperform), HCA Holdings (HCA/$34.63/ Outperform), J.P. Morgan (JPM/$43.13/Strong Buy), and United Healthcare (UNH/$49.74/Outperform). The name showing the biggest decrease in institutional holding was Cisco (CSCO/$16.53/Market Perform).
The call for this week: This week should be âkiss and tellâ with the equity markets in a position whereby they either gather themselves up and finally decisively break out above the 1340 level, or break below the SPXâs 50-DMA (@1325.35). This morning, however, itâs again European debt woes that are pressuring stocks to the downside leaving the S&P 500 pre-opening futures off some 13-points. If they open there, it would leave them slightly below that 50-DMA, indeed, kiss and tell time ...
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