Shares of the iShares MSCI Turkey Investable Market Index Fund (NYSE: TUR) has soared throughout 2013 and has even hit its 52-week highs trading at $77.38. Turkey as a whole has been experiencing robust growth as the Borsa Istanbul National 100 has surged to its highest levels in the past 25 years. We have been huge supporters of TUR dating back to August 8th, 2011 when we issued our first ‘BUY’ rating for the ETF in our article ‘iShares Turkey ETF (TUR) Poised for Success‘. Since then, TUR has appreciated +69.67% over the past 22 months.
What Attracts Investors to TUR
Investors looking to play the Turkish markets have few options. iShares MSCI Turkey Investable Market ETF (TUR) originally launched in 2008 is the only option avaliable to investors seeking a pure play exposure in the Turkish equity space. TUR is also the only ETF with dedicated Turkish exposure. The banking sector also plays a prominent role in the investable market in Turkey and TUR has a high concentration of financials in its portfolio.
What To Expect Going Forward
When it comes to Turkey, it has been the talk of a higher sovereign debt rating that has been lifting TUR, the lone ETF devoted exclusively to the country. Turkey, which has been engaged in a multi-decade conflict with Kurdish militants in the Southeast part of the country, is working to end the conflict. The government there is in negotiations with Abdullah Ocalan, the jailed leader of the Kurdistan Workers’ Party or PKK, in a bid to end the bloodshed.
Just last month, Moody’s Investors reported that Turkey’s ongoing efforts to bring an end to the conflict could be a positive credit step. Fitch Ratings upgraded Turkey’s long-term foreign currency Issuer Default Rating (IDR) to BBB- from BB+ back in November and the Long-term local currency IDR to BBB from BB, this is huge news as it’s giving Turkey its first investment grade ratings in nearly two DECADES.
This has been great news for investors as the speculation of a possible credit rating upgrade has lifted Turkish banks shares. TUR is heavily centered on the Turkish financial sector with 51.9% of its holdings in financial services stocks, quadruple its next largest sector weight, industrials.
Turkey’s economy has some good signs heading their way. Beyond this falling inflation rate, investors should note that Turkey has seen a plunging growth rate as well.
Turkey has good medium-term growth prospects and a diverse economy. The nation’s debt-to-GDP ratio stands at 39.9%, much lower than the debt-to-GDP ratio of many developed economies. On top of this, the country has a low employment rate, government reforms, strong, solid banking system, and improved credit rating. Adding all these solid growth factors together and Turkey could prove to be a great investment market in Europe for years to come.
If you have any further questions on either TUR, Turkey’s economy or any investment at all don’t hesitatet to contact us at all by emailing us at jameshartje@StocksonWallStreet.com or Follow our Contact Form
Also make sure to tune in later this week for our long-term outlook on TUR along with more detailed analysis on both Turkey and other emerging markets.
If you were able to flip a switch & go back a year ago today you know what you would have? A lot of big questions marks & some major unknowns about what to expect from Stocks on Wall Street most recent investment advice. On April 30th, 2012 to a lot of people’s surprise, Stocks on Wall Street published an article titled:
The title is rather self-explanatory but just to make sure it’s clear to everyone we recommended our readers to invest in three relatively unknown, highly speculative small to mid cap Chinese tech stocks.
When we originally made these picks it was an interesting time to be involved in the technology sector. Mark Zuckenburg has just taken Facebook public and thanks to the IPO heard around the world, many analysts and investors alike focused their full attention on Facebook’s IPO not recognizing that there was plenty of better investment opportunities out there, they just needed to be found. At the time, analysts were raving about America’s growing tech boom and all the different strong technology giants we had in the U.S. The thing was, many of these U.S. tech giants had done nothing to prove themselves and really it was the media blowing everything out of proportion most infamously the whole Facebook IPO and it’s 24/7 news coverage. When you looked at the facts, it was really China with the upper hand and the one in the driver seat. With a population of over 1.4 billion and a booming tech industry it was really China who had emerged as the true player in the tech world holding many of the top up and coming tech stocks. At the time our favorite Chinese tech stock was Tencent Holdings who is the equivalent of Facebook to China. All you need to do is put both Tencent Holdings (0700.HK) and Facebook’s (FB) charts next to each other to see which company was leading the way. At the time, we had already been current Tencent shareholders leading even more to our reasoning of finding a completely new investment route than we are use to.
Instead of choosing to invest in what many considered to be China’s three can’t miss, large-cap tech stocks. They are as follows, Baidu (NASDAQ: BIDU), China Mobile (NYSE: CHL), & Sina Corporation (NASDAQ: SINA). We on the other hand decided to take the road less traveled and in this case steep.
Collectively we decided we would target three small to mid-cap Chinese tech stocks. The highly speculative nature of the picks was something that intrigued us quite a bit. While these stocks were relatively unknown to the average investor they weren’t to us. Like when making all our investment decisions, we made sure we new the inside and outs of all three picks and while they had some relatively high risks to them we believe the potential gains made them worth the risk. As a result, we invested in the following three Chinese tech stocks and for those of you who have read our original article you would know that we did outline the speculative nature of these picks just so our readers new that they weren’t your typical, conservative investment opportunity. The three stocks we invested in were the following:
- RDA Microelectronics (NASDAQ: RDA)
- Spreadtrum Communications (NASDAQ: SPRD)
- Vimicro International (NASDAQ: VIMC)
Hands down we had made the right decision & no we were lucky we avoided investing in any of the Large Cap Chinese Stock Picks. Instead going the route of our three speculative Chinese tech plays ended up being the right call. You can overlook these things in every possible nature but overall our decision paid off big-time especially when you factor in how our three Large Cap counterparts performed during that same time period.
If we had gone with our large cap tech strategy we would have held positions in the following:
- Baidu (NASDAQ: BIDU)
- China Mobile (NYSE: CHL)
- Sina Corporation (NASDAQ: SINA)
Over the past year, all three stocks performed well below their expectations producing negative overall yields across the board.
- Baidu (NASDAQ: BIDU) -36%
- China Mobile (NYSE: CHL) -2%
- Sina Corporation (NASDAQ: SINA) -6%
How happy do you think our readers would have been if all we had to show them was a total net loss of -44%? Not happy one bit, we can tell you that.
Luckily, we chose the alternative route & as a result we believe our readers will be extremely pleased with our overall performance. Over the past year, all three stocks have taken virtually a different route than planned but the good part is RDA was the only pick that failed to produce any substantial gains. That’s right, RDA really struggled last year & heading into 2013 with the overall share price falling -28%. The good news is that SPRD decided to have an exceptional year grossing +57%, which will put us comfortably back in the lead. Finally, last but not least we have VIMC who performed steady & strong all year long grossing a total of +17%.
1. RDA Microelectronics (NASDAQ: RDA) -28%
2. Spreadtrum Communications (NASDAQ: SPRD) +57%
3. Vimicro International (NASDAQ: VIMC) +17%
As you can see, it was quite a different tale of the two story lines.
A large part of our success comes directly thanks to the exceptional year that SPRD had appreciating over +57%.
You can’t let VIMC’s performance & achievements go unrecognized, as +17% is still a great one-year yield.
As for RDA, there’s not much we can say other than it just wasn’t their year. If anything, they were lucky they got to team up with such a dynamic duo as RDA’s -28% would them only behind BIDU as the worst pick of the group.
Not quite done just yet, there is one last thing we’d still like to analyze. Lets see how our 12-month price targets matched up with each picks actual total net gains.
To start we have VIMC who we originally bought at $1.28 per share. While VIMC had a solid year appreciating +17%, it didn’t come close to our 12-month price target as we set the bar ridiculously high with a price of $2 per share. This would have resulted in a total yield of 56%. C’mon now they’re not SPRD lol!
As for SPRD, they were another pick where we set the bar ridiculously high. We bought our original shares at $13.80 so issuing them a 12-month price target of $21 per share is a tough feat as that’s a total yield of 52%. We sure hope you all remember just how great SPRD performed & the yield they brought in this year as even though we set the bar high, they still beat it by a cool +5%.
Last but not least we have RDA holding up the bottom at -28%. When we first invested in RDA it was trading at $12.87. Originally we had anticipated RDA would at least be trading in the positive territory throughout 2012 & 2013 so we set a modest 12-month price target of $14.50 resulting in a total yield of 12.66%. Sadly even with the modest expectations it just wasn’t RDA’s year at all, lets just hope they come back next year stronger than ever.
To some people the RDA pick will bother them as they have a tough time accepting defeat especially if that was your decision making that let to the defeat. But since all three picks were made collectively together it’s in our best interest to put RDA behind us & focus in on the all the good things that came of today. It’s all about looking at the big picture & seeing that there is nothing worth complaining about as in fact we should be quite satisfied with ourselves & equally impressed as producing a total net yield of +46% is a great achievement. It stands even more impressive when you factor in just how bad the Chinese large cap tech stocks performed. If there is one thing you can still easily see is that our economy is still struggling worldwide & that we are still a ways away from times of economic prosperity. These aren’t your fathers boom years where whatever you put your money into in the markets it just went up. You try that kind of strategy now a days & you’ll be quickly asking where’d your money go. It clearly takes a strategic investment mind & someone with in-depth knowledge about the markets & what they’re doing to produce consistent gains trade after trade.
A comparison we always like to make is to see how both the NASDAQ & Dow Jones Industrial Average have been performing during the same time period. Over the past year it was actually the NASDAQ who slightly edged out the Dow Jones appreciating +14% compared to +12.15%. That’s where I like to factor in our average yield per pick which was +15.33% & you can see that even with RDA’s struggles we were able to beat the markets & that we made the right overall decision in investing our money. Now the next question is where to next?
Everyone make sure to tune in later this week for more in-depth analysis on all three of our picks. Stocks on Wall Street will be reassessing our overall position on each of them, offering new analysis & guidance going forward, we will be again handing out our 12-month price targets along with offering our final overall decision on whether we are going to hold onto any of the three stock picks or whether we decide to take our gains & relocate somewhere else to find the next great investment opportunity.
Back on July 2nd, Stocks on Wall Street released an article on Rex Energy (NASDAQ: REXX) recommending the stock as a ‘BUY’ and signaling to investors to purchase shares at the price of $11.62. Due to overall strong performance and increased optimism around both Rex Energy and the growing region they drill in we decided to upgrade our position and offer some new changes and updated guidance on Rex.
How Has Rex Energy Actually Performed?
Since our recommendation REXX has performed exceptionally well soaring over 39% in a 9-month period all the way to $16.11. At its peak, shares hit $17.33 a total yield of well over 50%. After further examining REXX’s financial statements we are still optimistic especially since overall numbers have improved, better positioning the company for the long-run. Below are some five reasons to continue to be bullish on Rex.
Five Reasons to Continue to Be Bullish on Rex Energy
- REXX’s PEG Ratio improved substantially rising from 0.96 back in July 2012 to currently 0.51. This is direct proof that management’s overall strategy and efficiency have been very effective positioning the company for a strong year going forward.
- The company has beat earnings estimates the last two quarters and as a result consensus earnings estimates for 2013 and 2014 have increased.
- Three initial test results from the Utica prove to be hugely successful and big wins for Rex indicating the liquid-rich area is even more prosperous than they originally projected.
- As a result of all the positive feedback, strong numbers, & overall consistent performance analysts across the board have raised their price target for REXX from $16 to well over $19 a share while continuing to maintain an ‘Outperform” rating on the stock. Overall 82% of the analysts watching the stock have issued a ‘BUY’ rating or higher.
- Like we have mentioned before REXX continues to be a logical acquisition candidate for a bigger player. Why? It’s due to the fact that REXX is a small cap company worth a little over $1B however their robust production, growth and valuable set of assets make them a very desirable company in the eyes of the big players.
What Risk Factors to Account For
REXX is not immune to everything and if there is a weakness it’s the concern in their liquidity going forward especially if gas prices were to fall much lower. Investors shouldn’t be all to concerned however as we continue to see management effectively combatting this issue and in the past they have always found ways to keep production fully up and running so we have no reason to doubt that they would stop such efficient business practices now. In addition, Rex still has various assets for sale, which have helped provide a safety net if liquidity issues were to ever arises. After examining the books, it looks like REXX is in a much better financial situation now then it was just 9-months ago which is a good indicator going forward. When we first recommend Rex, the company had about three years of liquidity before they would have had to start cutting back on their drilling program or finding other sources of cash. Today’s current rate shows Rex has well over four years worth of liquidity, an optimistic sign for investors and further proof of management’s effectiveness.
Increased Spending Followed By Increased Expectations
Going forward expect Rex to continue to perform exceptionally well as they increase the amount of capital they’re spending on production, which in return should deliver much higher revenue numbers. When talking about the successful recent tests and the future potential in the region Rex’s CEO, Tom Stabley, said, “that the company believes the past results demonstrate the huge opportunity that exists for continued superior well performance in this region going forward.” Stabley used these tests as a key reasoning behind the company’s huge capital spending program. Rex isn’t the only one increasing their spending either as both Gulfport and Magnum Hunter Resources are following suit and spending a large portion of their 2013 capital budget on the play. With such a huge increase in capital spending, expectations are very high, as hopefully the move will prove it’s worth generating significant liquids-rich growth for all three companies.
Overall Long-Term Outlook
Overall, we continue to be very Bullish about Rex Energy anticipating huge liquids growth production coming from the Utica shale. As a result we expect REXX shares to continue to outperform their peers and as a result we are raising our original 12-month price target from $18.50 to $20 per share, a total net yield of 72% on the year and an additional 32% from the current stock price.
Although copper prices hit a one-month low this week, we believe the broader global trend bodes well for copper prices to rebound through the remainder of 2013. The convergence of emerging market demand, a global boom in infrastructure development and a constraint on new supplies of copper will pus copper prices higher.
Prices will be influenced by demand from China and emerging markets, economic activity in the U.S. and other industrialized countries and especially a renewed international and U.S. push to rebuild global infrastructure.
Limited New Supplies of Copper
A major factor will be the timing of new supplies of copper and production levels of mines and copper smelters. Companies that have a high leverage to copper prices will benefit immensely from the potential demand for the metal in the developing markets. We believe that a slowdown in developing new copper supplies presents a major investment opportunity. Copper mining stocks that are well positioned to capitalize on this slowdown and poised to quickly develop new supplies of copper supplies represent a significant investment opportunity.
Temporary Weakness, but Strong Outlook.
Weaker-than-expected U.S. housing construction data and worries about China’s real estate market fueled concerns about future demand for copper. China accounts for 40% of global copper usage. And real estate construction is a major drive of copper demand. This week’s $3.63 per pound price on the Comex division of the New York Mercantile Exchange is the lowest traded price since Jan. 17.
Traders still see positive signs in the U.S. housing report, however. Compared with a year ago, new U.S. home sales were up 23.6%. Investors follow construction data closely for clues about future demand for copper. Analysts at Goldman Sachs said in a report, “The ongoing structural recovery in U.S. housing activity is set to be an important contributor to global copper demand growth (as well as market sentiment) in 2013, and should be a bullish drive of copper prices.” Goldman reiterated its forecast for copper prices to reach $4.08 per pound within the next six months.
Talk that China might introduce new restrictions for its property market also drove copper prices lower. Some local Chinese governments set limits on mortgage lending to dampen speculation as property prices in major Chinese cities rose for the first time since 2011.
Copper Prices Correlate Strongly to Economic Outlooks
Copper ranks third after iron and aluminum in terms of consumption of industrial metals. It is particularly important for infrastructure development. Construction comprises the single largest market for copper, followed by electronics, transportation, industrial machinery and consumer products. We witnessed record high prices for copper from 2006 to 2008 as growing demand from emerging economies and, in particular, China powered a surge in prices and very low inventory levels. Then prices dipped in December 2007 to a low of $1.26 per pound due to the U.S. financial market crisis, concerns about the global economy and reduced consumption. However, Copper prices bounced back to an average of $4.00 per pound in 2011 and averaged $3.61 per pound in 2012 – a drop of 10% from 2011. This drop reflected concerns about China’s slowdown, the European sovereign debt crisis and a sluggish U.S. economy.
The drop in price has hurt the results of major copper producers like Freeport-McMoRan Copper & Gold (NYSE:FCX), Southern Copper (NYSE:SCCO) and Newmont Mining (NYSE:NEM) – all of which suffered in 2012.
Long-term Bullish View on Copper
Nevertheless, in spite of its volatility, we have a long-term bullish view on copper. Our perspective is supported by copper’s widespread use in construction, limited supplies from existing mines and especially the absence of major new development projects.
Zack’s Industry Outlook (Feb. 14, 2013) stated that all signs point to a recovery in copper prices driven, in part, by accelerated production among Chinese manufacturers. Morgan Stanley predicts copper prices will rise 7.6% in 2013 to $3.88 per pound or $8,554 per metric ton (MT), up from $7,952 in 2012. HSBC’s chief economist, Hongbin Qu, said last week that, “Despite the still tepid external demand, the domestic-driven restocking process is likely to add steam to China’s ongoing recovery in the coming months.” And Bloomberg reported that the forecast for rising copper prices is based on anticipated demand increases from China, the U.S. and even Europe.
Global Infrastructure Investments will drive Copper Higher
The push to expand global infrastructure is a key indicator in our belief that copper prices will continue to push higher through the remainder of 2013. Consider these key indicators driving global infrastructure investments:
Emerging Markets. Growth in the emerging markets, particularly China and India, was a major driver of copper demand over the last few years. However, of late, demand in China has slowed down. China’s recent $150 billion infrastructure stimulus has helped improve the sentiment somewhat and holds promise for the metals and mining industry going forward, as we note below. This global economic slowdown is the biggest headwind for the metals space overall at present. Nevertheless, the long-term picture remains a lot more promising as the emerging market economies are expected to get back in shape with the help of expected fiscal and monetary stimuli.
China’s Infrastructure Expansion. China’s economy is beginning to rebound even though the pace of the recovery will be slower than previous periods. China’s new leadership recently announced fresh stimulus measures that will likely bolster demand for copper. Although Chinese exports remain weak, the good news is that home prices and homes sales in China are rebounding. The new Chinese leadership has reiterated its support for a conventional mix of proactive fiscal policy and many analysts believe they will be successful in boosting growth from +7.8% in 2012 to +8.0% in 2013 and +8.3% in 2014. The implication for the construction market is that growth will continue. The stabilization in investment since mid-2012 has prevented China’s slip toward a feared hard landing, supported by a V-shaped recovery in infrastructure, which hit a trough with a -4% contraction in the first two months of 2012, but is now increasing by nearly +15% year-on-year.
The main construction driver in China will continue to be infrastructure. Although the heyday of growth for China’s construction market may be over, the sheer size of the market will keep it among the most attractive in the world for the foreseeable future. China’s new leaders are pushing a new type of urbanization that has major implications for the construction sector and, in turn, for copper prices. In particular, their “intelligent city drive” which relies on modern information technologies such as telecommunications and cloud computing, will involved the building of intelligent systems serving a wide range of sectors from public security, healthcare, transportation and the power grid.
Group 20 Global Infrastructure Push. A hot topic this week in Moscow at the The Group of 20 agenda is an issue that has long affect emerging markets’ economic growth plans: weak infrastructure. India has called for better infrastructure funding. Russia has made investment financing a priority on how to kick-start global growth. In emerging Asia, much-needed infrastructure projects fall through as a result of funding problems. The World Bank estimates that countries in the East Asia Pacific region need $400 billion of investment in infrastructure annually, while South Asia needs around $200 billion. Infrastructure spending will remain a key issue throughout 2013. This focus on construction will only serve to drive global demand for co copper.
Obama’s “Fix it First” Policy. President Obama’s recent State of the Union plan to repair the nation’s ailing infrastructure should not be overlooked. His “fix it first” policy calls for investing $50 billion in transportation infrastructure. Obama also called for the creation of a National Infrastructure Bank to bring public and private financing together to plan projects. Coupled with the U.S. housing recovery we touched on earlier, we believe the U.S. will certainly contribute to what we believe will be a growing demand for copper in 2013.
Bottom Line: The bottom line here is that the global push to rebuild infrastructure will almost certainly create a knock-on effect that will drive the prices of industrial metals higher. Copper promises to be at the forefront of that trend.
Supply Constraints will Drive Demand Higher.
Copper prices will be heavily influenced by the timing of new supplies of copper and the production levels of mines and copper smelters. Companies that have a high leverage to copper prices will benefit immensely from the potential demand for the metal in the developing markets. Cost inflation in the sector is also expected to be a headwind for metal and mining companies over the next several years, driven by a number of factors such as labor, energy, ore grades, currencies, supply constraints and taxes. Plus, global economic uncertainties, softening commodity prices and higher input costs are increasing the pressure on company margins.
To counter all this, mining and metals companies must constantly review their portfolios to identify underperforming assets and shut down or divest high cost and non-core assets. Industry consolidation, automation technology, owner-operated mines and investment in energy assets are some of the steps that companies can take to offset to the impact of rising costs.
Production drops for World’s Largest Copper Company.
Expanding copper mining production continues to be a challenge for Chile’s Codelco, the largest copper producing company in the world. Codelco (the National Copper Corporation of Chile) is the Chilean state-owned copper mining company, formed in 1976 from the foreign-owned copper companies that were nationalized in 1971. Codelco produced 1.66 million tons in 2007 – 11% of the world total. It controls about 20% the total global copper reserves. They recently reported that their own production dropped in 2012 to the lowest level in four years. And figures from the last monthly newsletter issued by Cochilco (Chilean Copper Commission) show that the state-owned copper company produced a 5.1% less copper in 2012 if compared against 2011. According to CEO, Thomas Keller, Codelco’s 2012 production was down primarily due to “dwindling ore grades” in all its deposits. BHP executive, Peter Beaven, recently told an industry gathering in Santiago, “Mining in Chile is at a turning point as the industry requires large expenditures just to maintain throughput.”
Copper miners across the globe continue to expand production. Grupo Mexico (OTC Pink: GMBXF) plans to spend $2 billion on its mining division this year, a portion of which will go towards the company’s Buenavista mine in Northern Mexico. The company wants to produce 1.4 million metric tons of copper per year by 2015, Reuters reported. BHP Billiton (NYSE:BHP) expects its copper production to increase in 2013 and 2014 by a 10% compound annual rate, largely driven by its Escondida mine in Chile, which is on track to increase its production by 20%.
10 Biggest Copper-Producing Countries
(000 metric tons)
10 Biggest Copper Producers
(000 metric tons)
|1. Codelco (Chile)||1,757|
|2. Freeport-McMorRan (USA)||1,441|
|3. BHP Billiton (Australia)||1,135|
|4. Xstrata (Switzerland)||907|
|5. Rio Tinto (UK/Australia)||701|
|6. Anglo American (UK)||645|
|7. Grupo Mexico (Mexico)||598|
|8. Glencore Intl. (Switzerland)||542|
|9. Southern Copper (USA)||487|
|10. KGHM Polska (Poland)||426|
Freeport-McMoRan’s (NYSE: FCX) fourth-quarter net income rose 16%, to $743 million, as sales in the previous year were depressed by labor disruptions in Indonesia. The company aims to grow its annual copper production to over 5 billion pounds per year in 2015 from 3.66 billion pounds in 2012, and expects its $20-billion acquisition of Plains Exploration & Production (NYSE:PXP) and McMoRan Exploration (NYSE:MMR) to close in the second quarter of this year. Union workers at two of Southern Copper’s (NYSE:SCCO) properties in Peru may go on strike if they don’t reach an agreement with the company within 15 days, Fox Business reported, citing a union leader.
Back to copper, the metal is essential for modern living. It delivers electricity and clean water into our homes and cities and makes an important contribution to sustainable development. More than that, it is essential for life itself. Copper is interwoven with the story of humanity’s progress. It has crucial role in our homes, in transportation, as well as in infrastructure and in our industries is omnipresent.
Economically, copper consumption is closely associated with industrial production, and therefore, tends to follow economic cycles. During an expansion, demand for copper tends to increase, thereby driving up the price. As a result, copper prices are volatile and cyclical. Swingplane Ventures has seen some analysts pick up as one research firm just issued a $10 target price on Swingplane Ventures. The firm said that a due diligence property evaluation suggests there is a significant opportunity to further develop the mineral potential of the property and dramatically increase the current level of production. The company intends to evaluate potential to: 1) increase the current level of production and 2) undertake construction of a processing facility to maximize recovery of economic grades of copper concentrate.
Notably, in early January, First Quantum Minerals, a $9 billion mining company, made an offer of $5.1 billion to purchase Inmet Mining which holds a very coveted copper mine in Panama. Inmet Mining, a company with a prized copper mine has almost doubled in market valuation this past year alone. Swingplane Ventures operates in the copper market in Chile, located in South America. This part of the world has been proven to possess extremely profitable copper mines as seen by First Quantum’s offer for Inmet. After further due diligence and research, we are upgrading the stock to $11.50 with a possibly buyout looming.
There have been some worries surrounding copper because of the short-term macroeconomic concerns regarding the US and Europe. However, the fundamentals are still excellent for copper: as Asia represents over 60% of world demand with China by itself at 39% and could reach 45% in 5 years. Southern Copper forecasts that China and Emerging Markets countries will continue growing, albeit at a lesser pace, but still showing substantial gains. The company also notes that limited production upside and falling grades will result in a deficit copper market going forward.
Now, we take a closer look into a recent news item for the metal signifying of some larger trends. The fundamentals for copper are clearly improving as the world’s copper usage and demand for copper is picking up. Friday, was a prime example of that as copper futures rose the most in a week as China’s trade expanded more than forecast, and car sales jumped to a record in the Asian nation, the world’s biggest consumer of industrial metals. In January, exports from China surged 25% and imports climbed 29% from a year earlier, both topping projections by economists in Bloomberg surveys, government data showed today. Sales of passenger vehicles surged 49%, a state-backed trade group said. A 6 month price chart of copper follows.
Knowing that we are not the only ones bullish on the metal has given us more confidence in our own thesis. This fact was demonstrated this week when Kevin Puil, the Malcolm Gissen & Associates portfolio manager, went through his bullish thesis on Seeking Alpha. Puil said “The fundamentals for copper remain highly favorable and I continue to see secular demand for most commodities, copper in particular. Industrialization and urbanization, especially in the BRIC [Brazil, Russia, India, China] countries, is not about to stop, and this continues to put pressure on copper miners, who struggle to keep up with demand. Supply growth has slowed due to lower grades, higher costs and political unrest. In addition, the new projects and mine expansions that were scheduled to come on-line haven’t materialized, and if they do, it will not be in a timely fashion. Quite frankly, I think you could see copper peak above $4 a pound [$4/lb] this year…”
The decline in output that Puil discussed is already being seen in the financial markets as Teck Resources (TCK), Canada’s largest diversified miner, may consider acquisitions in copper mining to help offset an expected decline in the company’s output of the metal.
(HBM) is a Canadian integrated mining company with operations, development properties and exploration activities across the Americas principally focused on the discovery, reduction and marketing of base and precious metals. The company’s objective is to create sustainable value through increased commodity exposure on a per share basis by growing long-life deposits in high-quality and mining-friendly jurisdictions. HudBay is a strong stock with great analyst coverage. Of the five analysts currently covering HBM, all five have buy ratings or higher.
Southern Copper (SCCO) is one of the largest integrated copper producers in the world, and has the largest copper reserves of the industry. The company produces copper, molybdenum, zinc, lead, coal and silver. SCCO is 81.3% owned by Grupo Mexico, a Mexican company listed on the Mexican Stock Exchange. The remaining 18.7% ownership interest is held by the international investment community. All of its mining, smelting and refining facilities are located in Peru and Mexico, and the company conducts exploration activities in those countries and Chile. Southern Copper has performed quite well recently with shares soaring more than 23% over the course of the past three months.
China’s Jiangxi Copper (SSE:600362) and Japan’s Pan Pacific Copper said mining companies will pay “at least 10% more in fees” to process copper this year, China Daily reported. And Chinese mining companies have invested more than $1 billion in copper. Newmont Mining (NYSE:NEM) expects gold and copper production in 2013 of approximately 4.8 million to 5.1 million ounces and between 150 and 170 million pounds, respectively. The company plans to spend up to $2.3 billion on various projects this year. Sierra Metals (TSXV:SMT) announced that in 2012 its copper production rose 51%, to 15.9 million pounds, from the year before. For 2013, it expects copper production of up to 23.1 million pounds.
Bullish Stance on Copper
Notwithstanding the current volatility in prices, we have a long-term bullish stance on copper, supported by its widespread use, limited supplies from existing mines and the absence of significant new development projects. Prices will be influenced by demand from China and emerging markets, economic activity in the U.S. and other industrialized countries, the timing of new supplies of copper and production levels of mines and copper smelters. Companies that have a high leverage to copper prices will benefit immensely from the potential demand for the metal in the developing markets.
If you’re looking for strong, compelling investment opportunities then look no further than the oil and natural gas sector. We believe oil and natural gas are long-term winners as they’re finite resources that will serve a vital role in our global economy for many years to come. The industry as a whole is primed for an uptick. In fact, the industry anticipates spending close to half a trillion dollars on exploration and production in the coming year. With the world’s largest companies like Chevron and ExxonMobil leading the way, it’s hard to believe that this is just a hunch.
As the BP Oil Spill is finally becoming a thing of the past, we are starting to see a huge shift from the cautious spending we have seen the past few years. With oil and natural gas prices expected to be at least sustainable if not substantially increase, expect the industry as a whole to continue to profit especially Deep-water drilling plays. Below we have two great Deep-water drilling stocks that you should invest in:
GulfMark Offshore (NYSE: GLF)
GulfMark Offshore provides offshore marine services throughout the world to companies involved in the exploration and production of oil and natural gas. We believe GLF is a strong buy opportunity for several reasons. To start, GLF has one of the youngest fleets in the industry and has seen recent drilling success in areas like East Africa. On top of that we’ve seen increased activity in other areas like the Black Sea and Falklands giving the company reason for optimism. 14% of GLF’s shares are currently owned by insiders, an optimistic indictor especially as GLF executives are required to hold shares giving them further incentives to contribute to GLF’s future success.
In recent months, GLF has gone relatively unnoticed due to the lingering effects from BP’s Deep-water oil spill. However, we believe we are finally turning a page on that incident. Analysts are finally Bullish on GLF as 85% of the 13 analysts covering the stock rate it as a BUY or higher. GLF has shown us the ability to make money, producing solid profit margins and total revenues for several consecutive months now. Going forward expect GLF’s capital expenditures to drop significantly, giving the company a nice boost in cash flows. The stock currently trades around 0.9 times its book value, below its 10-year average of 1.7 making it a more enticing play. Like we stated earlier, we believe oil and natural gas are long-term winners and GLF is a direct pay on that outlook.
Our 12-month price target is $50, which would result in a total-yield of 35% add on a 2.70% dividend and you have a total net yield of 37.70%.
Transocean (NYSE: RIG)
Transocean is now notorious for being known as the company that operated the fateful Deep water Horizon drilling rig for BP. Investors who know the company; realize that it’s much more than that. Transocean is the world’s largest offshore drilling contractor with 140 rigs operating around the world. Locations include Africa, the North Sea, South America, Southeast Asia, and of course the Gulf.
RIG contracts the operation of these rigs to oil companies like BP, ExxonMobil, and Anadarko. These companies pay Transocean a day rate ranging from $50,000 to $650,000 per day, depending on the type of rig. Ultra-deep water rigs, ones that drill up to 40,000 feet in water, command the most, while standard jackups command the least.
We believe Transocean is a strong investment and a compelling play as the market has unfairly set some really low expectations for the stock. Despite the horrific incident in the Gulf, global oil demand is not declining. As a result, RIG will continue to play a leading role in extracting oil worldwide.
RIG has a solid book of business overall. We like their 0.67 PEG Ratio, $10 billion in revenues, and the 6 billion in cash on the books. Analysts are also finally becoming bullish on Transocean as 71% of the 41 analysts currently covering the stock hold a BUY rating or higher.
Overall we believe RIG is a compelling undervalued play and an investment opportunity you should take advantage of. Our 12-month price target is $75, which would result in a total-yield of 31%.
Gold is an commodity that’s often talked about, is it still a good trade? See what Visual Economics thinks in the single biggest gold infographic you will see:
We have been keen followers and supporters of Macau’s growth ever since we first tapped into the Asian gambling markets back on May, 2010. We first started following Macau after advising investors to invest in the three major casino players Las Vegas Sands (LVS), Wynn Resorts (WYNN), and MGM Grand (MGM) all of whom had significant growing interests in Macau’s booming gambling market. Since then we have revised our positions most recently recommending investors to bet strongly on LVS and hold-off on WYNN. To read the original article click on the link: Best Bet on Macau? Las Vegas Sands or WYNN Resorts? So far, our hand has played great as LVS is up more than 20% while the WYNN is down 1%.
As for MGM Grand, they are another big casino player and one to watch with great interest, as they too have been on a soar as of late. We also have been long-term supporters of MGM as you can see in our article: MGM’s Prospects Growing: Huge Opportunity in Macau
What should you expect in the long-run now from both LVS & MGM? You’ll have to wait and see, tune into Stocks on Wall Street Monday for an updated position on both picks.
StocksonWallStreet readers know I’ve been bullish on Vietnam. Bloomberg seems to agree. The Bloomberg Markets, November 2012 list of the most promising Frontier markets for investors ranks Vietnam #1. United Arab Emirates is #2 – a market I also think has strong growth potential.
It’s no secret that growth in the U.S. and Europe over the next decade will be outpaced by the BRIC’s and emerging markets. Adventurous investors looking for even more attractive growth potential should also consider Frontier markets. Frontier markets tend to be smaller than emerging markets. Shares of frontier companies are also harder to trade than those of emerging countries.
I like Frontier markets that are moving to Emerging Markets. Developed capital markets are key to becoming an emerging market. So, I’m most interested in economies where the stock market is developing and companies are beginning to get access to capital. Also, it’s worth noting that weakness in China tends to get picked up by Frontier Markets. Sectors that show the most promise in Frontier markets are technology, energy, consumer discretionary and industrials that benefit from infrastructure improvements.
Vietnam fits the bill on all counts. It has enjoyed a strong and consistent average GDP growth of 7.2% annually since 2000 and projected cumulative GDP growth from 2012-2016 is 31.4%.
The main ETF tracking Vietnam is the Market Vectors Vietnam ETF (VNM) sank 47% in 2011 and was one of the worst performers in the entire emerging world which fell by an average of 21% in 2011. These horrible losses were largely due to runaway inflation. While inflation is still high (around 20%) it appears the country is finally starting to turn around. VNM is certainly capable of producing huge gains. VNM is up about 36% year-to-date, suggesting that investors who have a high-risk tolerance may want to consider making a play on this Vietnam ETF.
Macau has become the world’s number one gambling market, overtaking Las Vegas as a result of a huge development surge over the past 5 years. Once a seedy sideshow to nearby Hong Kong, Macau now draws millions of Mainland Chinese visitors, who can’t legally bet at home. Over 3 billion people live within a travel radius around Macau. Macau’s growth has drawn the attention of investors. Stocks on Wall Street began looking at Macau’s growth over two and a half years ago in our May 28th, 2010 post titled, “What Happens in Vegas Now Happens In Macau.” Major gaming companies have increasingly invested in Asia in recent years, with massive profits in return.
Our conclusion in 2010 was that both Las Vegas Sands (NYSE: LVS) and Wynn Resorts (NASDAQ: WYNN) were well poised to begin new, major advances. Since then, both stocks have performed exceptionally well: LVS, +95.78% and WYNN, +41.83%.
It’s time to revisit Las Vegas Sands and Wynn Resorts and determine how they might perform going forward. Here’s our analysis:
Las Vegas Sands (NYSE: LVS): Undervalued, STRONG LONG-TERM BUY
Some analysts consider LVS expensive at a multiple of 26.2 times past earnings. However, we think LVS is undervalued and poised for continued long-term growth, in spite of what we believe is excessive bearish pessimism over Asian growth.
As mentioned above, LVS appreciated 95.78% since we first mentioned it on May 28, 2010 – up from $23.12 to $45.97 on October 30th, 2012. However, LVS has been on a bumpy ride over the past 12 months during which the stock price depreciated -2.35%. Year-to-date appreciation has been +3.33% and LVS’ stock price dropped -17.16% over the past 6 months. Yet, over the past 3 months, it has appreciated +22.46%. So, you can see what we mean when we say that LVS’ stock price has been all over the place over the past year.
Nevertheless, as its new casinos become fully operational, we believe LVS’ growth prospects will soar based on the market’s tendency to think in terms of “what have you done for me recently?”
Analysts across the board are becoming more bullish about LVS’s prospects with 24 of 28 issuing a ‘STRONG BUY’ or ‘BUY Recommendation for the stock. See the chart below for more details:
We are particularly optimistic about LVS’s outlook relative to its competitors. We expect LVS to generate its greatest earnings growth in Macau. However, we’re equally optimistic about the company’s endeavors in other emerging markets. There are rumors that LVS is in talks with banks to get financing to develop a resort in Spain.
So What to Expect?
In the short term, bears may bet the LVS down due to concerns over capex. However, in the long run, it should pay off significantly thanks to a growing consumerist population in Asia. If China’s Golden Week sales growth of 15% is any indication, the company can perform well even on off days.
With about 85% of its business leveraged towards Asian gaming, LVS stands to gain big from the current stimulus programs being implemented in China. Singapore, one of the strongest economies in the world, currently has two major casinos – one that is operated by LVS. We expect the LVS to increase its dividend yield (current: 2.20%) and issue a share repurchase program to encourage investors to sit through the high capex periods and take a more confident outlook on the future.
Wynn Resorts (NASDAQ: WYNN) Expensive, HOLD/SELL
Wynn Resorts (NASDAQ: WYNN) has not delivered as strong a performance as its competitor, Las Vegas Sands. Nevertheless, Wynn has been a solid investment, +41.83% since we originally mentioned it on May 28th, 2010. Wynn Resorts is an excellent casino operator, but overall they’re less attractive than their major competitors. Let’s compare WYNN against LVS. Both stocks represent a very comparable in terms of size and revenue exposure to Asian markets. However, Wynn doesn’t stack up to LVS across a number of key indicators. For example, Wynn underperforms LVS in growth potential, balance sheet measures, leverage and profitability margins. Wynn only outperforms LVS in terms delivering a better capital return and free cash flow generation.
Wynn’s free cash flow is one of the company’s strongest points. They have dramatically turned things around over the course of the past 5 years. In 2007, Wynn was in the red to the tune of hundreds of millions of dollars. It is now proudly $2.1 billion in the positive. Nevertheless, the stock trades at a 7.4% valuation premium to LVS’ two trading multiples and has a higher PEG Ratio of 2.03 vs. 1.00.
Wynn has lowered its growth estimate substantially over the past year. Furthermore, when you value their stock relative to the company’s fundamentals they again miss the mark. As a result, 10 of the 27 analysts covering the stock have issued a ‘HOLD’ or ‘SELL’ rating for the WYNN. Look at the chart below for more details:
Wynn’s overvaluation wouldn’t be so bad if the company hadn’t performed so poorly over the past 18 months. Over the past 5 quarters, Wynn’s management has missed expectations four times by an average of 4.9%. That’s not a good sign for investors. Much like LVS, the stock has had its ups and downs and performed dismally over the past year, in spite of the recent surge over the past three months. Over the past year Wynn’s stock has depreciated -10.35%. Year-to-date is it up +4.35%. Over the past 6 months it is down -10.82%. And, like LVS, it has rallied over the past three months, +25.83%.
Bottom line on Wynn: Due to the lack of a sufficient margin of safety on this investment, we don’t recommend investing in Wynn. If you currently hold the stock, our suggestion is that you either hold the stock or take the recent 25.83% surge as an opportunity to cash out. If not, hold onto the stock for now as if there is one bright spot for Wynn – a new 51-acre casino resort on Macau’s Cotai Strip is scheduled to open in 2016. The company already operates Wynn Macau and Wynn Encore resorts in Macau. Its Cotai resort should provide much-needed growth and a significant boost to its revenue projections.
Las Vegas Sands (NYSE: LVS): Undervalued, Strong long-term BUY
- Analysis: Shares might dip in the short-term. However, we view LVS as a strong long-term play.
- 12-Month Price Target: $65; Yield, 31%; Dividend, 2.2%
- Total Net Yield: +33%
Wynn Resorts (NASDAQ: WYNN): Expensive, HOLD/SELL
- Analysis: Sell shares on a strong day or hold with hopes new casino developments will improve growth prospects.
- 12-Month Price Target: $115; Yield, 11%; Dividend, 1.7%
- Total Net Yield: +13%
Over the past five years there has been a huge surge of development in Macau, leading them to overtake Las Vegas as the world’s No. 1 gambling market. Once a seedy sideshow to nearby Hong Kong, Macau now draws millions of Mainland Chinese visitors, who can’t legally bet at home. There are over 3 billion people in a travel radius around Macau. Because of this huge shift, Macau has been the center of attention for many investors looking to profit off its growing popularity. Stocks on Wall Street has been one of these interested investors and back on May 28th, 2010 we wrote our first article about the investment opportunities in Macau:
What we concluded was that we thought both the Las Vegas Sands (NYSE: LVS) and Wynn Resorts (NASDAQ: WYNN) were well poised to begin new, major advances. Since then, both stocks have performed exceptionally well as LVS is up 92.29% and the WYNN up 37.65%. Below is our analysis on each stock and our future projections along with our current recommendations for each stock.
Las Vegas Sands (NYSE: LVS) Undervalued, Strong Long-Term Buy
We have been a huge fan of Las Vegas Sands for some time now. While some consider the company’s earnings to be expensive at 26.2x past earnings, we think it’s still a strong play and one that will appreciate significantly once the bears are proven wrong over Asian growth. Since we first invested in LVS back on May 28th, 2010 the stock has been a big winner, appreciating over 92%. Much of this growth came in the first year of trading, leading us to take profits at different intervals, in essence playing with the houses money. Nevertheless we still hold a sizable position and look to build on it as we think the stock is undervalued and poised for strong long-term growth. The past year has been a bumpy ride for LVS as shares have been all over the place, going up then down then back up, ultimately though making little progress. In the past year the stock has appreciated +9.35%, Year-to-Date +1.35%, past 6-Months -20.13%, and the past 3-Months +15.85% so you can see what we mean in all over the place. Nevertheless, as their new casinos begin operating we believe growth prospects will soar based on the fact that the market’s tendency to think in terms of “what have you done for me recently?”
As you can see in the chart below, analysts across the board are becoming more bullish about LVS’s prospects with over 86% of analysts covering LVS issuing a rating of ‘BUY’ or ‘STRONG BUY’ up from 80% just three months ago.
We are particularly optimistic about LVS’s outlook relative to their competition and we expect LVS to generate the greatest earnings growth in Macau. We are equally optimistic about the company’s endeavors in other emerging markets. Rumors are that LVS is in talks with banks right now to get financing to develop a resort in Spain.
So What to Expect?
In the short-term, the bears may bet the stock down due to their capex woes; however in the long run it will pay off significantly from a growing consumerist population abroad. If China’s Golden Week sales growth of 15% is any indication, the company can perform well even on off days.
With around 85% of their business leveraged towards Asian gaming, it stands to gain big from the current stimulus programs being implemented in China. One of the strongest economies in the world is Singapore and currently they have two major casinos, one that is run by LVS. We expect the company to increase their dividend yield (Current: 2.20%) and issue a share repurchase program to encourage investors to sit through the high capex periods and take a confident outlook on the future.
Wynn Resorts (NASDAQ: WYNN) Expensive, HOLD/SELL
While the Wynn Resorts has performed nothing like its competitor Las Vegas Sands, it still has been a solid investment up 37.65% since we originally invested back on May 28th, 2010. Wynn Resorts is an excellent casino operator, but overall they’re less attractive than their competition. A fair comparison, is valuing the WYNN against our other favorite, LVS. The two stocks represent a very close comparable peer due to their similar revenue exposure to the Asian markets and firm size however the WYNN’s valuations are again not favorable and don’t stack up to LVS. The WYNN underperforms LVS in growth potential, balance sheet measures, leverage, and profitability margins not to mention many other key indicators. The only advantage they have is a better capital return and free cash flow generation.
The WYNN’s free cash flow is one of the company’s strongest points as they have dramatically turned things around over the course of the past five years. In 2007, , they were in the red hundreds of millions of dollars and are now proudly in the positive over $2.1 billion. Nevertheless, the stock trades at 7.4% valuation premium to LVS’ two trading multiples and has a higher PEG Ratio of 2.03 vs. 1.00. Compared to its own financial conditions just a year ago, the WYNN’s growth estimates have substantially dropped. Adding to this, when you value their stock relative to the company’s fundamentals they again miss the mark. As a result, many analysts have issued a ‘HOLD’ rating for the WYNN as over 37% have a ‘HOLD’ or ‘SELL’ rating versus 62% issuing a ‘BUY’ rating or higher. Look at the chart below for more details:
The overvaluation wouldn’t be so bad if the company hadn’t performed so poor as of late. Looking at the past five quarters, management has missed expectations four times by an average of 4.9%. That’s not a good sign for investors. Much like LVS, the stock has had its ups and downs over the past year, performed relatively dismal despite for the recent surge the past three months. Looking at the overall performance of the course of the past year the stock has dropped -4.35%, Year-to-Date +1.35%, past 6-Months -7.85%, and then the surge over the past 3-Months +21.55%.
Bottom line, due to the lack of a sufficient margin of safety on this investment, we don’t recommend investing in the WYNN. For current investors either take this 21.55% surge over the past three months as an opportunity to cash out or hold onto the stock as if there is one bright spot, the firm’s Cotai resort development may generate positives in the near future.
Las Vegas Sands (NYSE: LVS): Undervalued, BUY
Analysis: Shares might dip in the short-term however we see LVS as a strong long-term play.
12-Month Price Target: $65, Yield of 31% + 2.20% Dividend
Total Net Yield: +33%
Wynn Resorts (NASDAQ: WYNN): Expensive, HOLD/SELL
Analysis: Sell shares on a strong day or hold with hopes new casino developments will improve growth prospects.
12-Month Price Target: $115, Yield of 11% + 1.70% Dividend
Total Net Yield: +13%
Chevron (NYSE: CVX)
Chevron has also performed very similar to Exxon, as we expected from the large cap oil plays. Chevron is a $200 billion dollar energy enterprise with operations all over the world. Since 2010, income increased 40% and sales have continued to grow riding on higher crude oil prices. Chevron invested $13.40 billion in 2011 in new projects and those investments have paid off dearly as in 2012. CVX earned over $230 billion in revenues for a total gross profit of $82.13 billion. Much like XOM, they are run like a fine-tuned machine top to bottom and the numbers back up their effectiveness: 11.55% profit margin, 16.47% operating margin, 11.27% ROA and 21.59% ROE. They to are a cash cow holding $21.46 billion in the bank and, like Exxon, offers them many options if they wish to expand or acquire another company. Analysts across Wall Street have a 77% Buy Rating for Chevron and expect the stock to continue to soar higher in the latter part of 2012 and into 2013. We originally expected Chevron to rise to $125 per share over a 12-month period and they have almost reached our target with a current price of $117.36. However, that doesn’t take away from how valuable of an investment they have been, up 19.51% to go along with a 3.2% dividend yield.
Complete Production Services (NYSE: CPX)
Complete Production Services was bought by Superior Energy Services (NYSE: SPN) in a cash-and-stock deal for $2.7 billion. SPN paid out $0.945 shares of its stock and $7 in cash for each share of CPX, which was valued at $32.90 per share representing a 61% premium overall resulting in a great payout for CPX investors.
InterOil Corporation (NYSE: IOC)
IOC is an independent energy company that operates in the upstream, midstream, and downstream business segments. Increasing revenues from 2010 to 2011, along with improved performance across the board to go along with the signing of an enormous contract in Papua New Guinea, provided us with strong guidance heading into 2012. IOC also held an impressive 83% Buy Rating and we expected the stock to rise significantly in 2012 and beyond. With a total market cap of $3.72 billion, IOC has been one of the top performing small cap energy plays in the past year up 85% year-to-date, another big win for investors.
Energy XXI Bermuda (NASDAQGS: EXXI)
Much like IOC, EXXI is an independent oil and natural gas exploration and production company. The majority of their business is focused in the U.S. Gulf Coast and the Gulf of Mexico. EXXI’s past acquisitions of certain Gulf of Mexico properties led to a significant increase in revenue up to $1.3 billion in 2012 for a total gross profit of $976 million. The companies management team has been very effective producing 25.77% Profit Margin, $37.08 Operating Margin, 10.19% ROA, and 28.55% ROE. Increased production and positive cash flows have gone a long way to strengthening the company’s balance sheet and reducing the company’s debt as they have gone from being in the negative to now having over $117 million in cash. The stock holds a strong PEG Ratio of 0.97 and a strong P/S Ratio of 1.97. On top of this, 11 of 12 analysts have a Buy Rating for EXXI. We thought the future looked bright for EXXI a year ago and after a strong 2012 campaign things look even brighter for 2013 and beyond. We originally expected EXXI to rise 35% over the next 12-months and currently trading at $33.26, EXXI is up 33.25% right on target with our expectations when you add to that a 0.98% dividend, EXXI has been a solid energy play for investors.
Recently we analyzed the great success Schlumberger (NYSE: SLB), one of our top energy picks, has had over the course of the past three months. Well today, we are analyzing our other top energy stock that we originally recommended back on June 25th, El Paso (NYSE: EPB).
Despite a slight sell-off throughout the past week of around 8%, overall we’ve seen a great performance by Schlumberger who’s up 21% since June 25th. Right behind them is El Paso Pipeline Partners (NYSE: EPB) who has soared 17% — along with a 1.5% dividend bump — since we first highlighted it on June 25, 2012
Like Schlumberger, we expect El Paso to continue it’s run through the ladder part of 2012. While we don’t think it will perform quite as well as Schlumberger , a great part about El Paso is their high dividend, which yields close to 6%. El Paso should continue to perform well through the final quarter of 2012 — bolstered by a high dividend yielding almost 6%. We recommend you hold the stock at least until the next ex-dividend date on October 27, 2012. The dividend payment date of around 1.5% is November 14, 2012. Following the stock’s solid run, a number of Wall Street analysts have shifted EPD from a ‘Buy’ to ‘Hold’. Here’s a summary of the analyst recommendations:
While this is may not justify selling El Paso, it is worth noting since EPB price targets were originally pegged at a medium target of $38.92 and a high target of $42.00. Stocks on Wall Street pegged El Paso at $42.00, predicting a total yield of 30% over a 12-month period. So, the return of 17.19% over the past 3 months is impressive, even though the growth rate may drop over the next few months.
El Paso traded at $37.54 on October 1, 2012 and is approaching its medium price target. We believe this may be the major factor in many of the analysts’ recent recommendation shifts. Here’s a break down of El Paso’s Price Target Summary:
El Paso expansion into the 42,000-mile North American natural gas pipeline system is expected to continue as the U.S. segues from foreign-produced oil to domestically abundant natural gas. EPB’s net income has grown 7.2% per annum of the past several years. Natural gas has yet to experience the boom many have anticipated; nevertheless, it will become a stronger performer in the energy market over the next five years. El Paso’s margins are strong versus competitors who must incur costs to transport/store natural gas. This pricing power makes EPD an attractive investment opportunity. Over the past 12 months El Paso’s gross margin and operating margin both rose 10%+.
EPB has a very stable pipeline business and their exploration unit has interested many investors as they continue to discover new lucrative territories to explore. El Paso’s very lucrative exploratory prospects, coupled with a stable cash flow, make the stock attractive long-term. EPB sells at a trailing earnings multiple of 19.16, a forward earnings multiple of 17.31, a book value multiple of 1.95 and a sales multiple of 5.5. All of these are huge discounts compared to industry peers.
With earnings coming up on October 17, 2012, this bodes well for El Paso to deliver higher multiples. Expect the stock to beat analyst expectations and receive a nice bump. We are raising our 12-month forecast from $42 to $44, which would add another 17.65% to its current price and deliver a total yield of 35% on top of its 6% dividend. Stocks on Wall Street believes EPB will be a great stock pick and a strong winner for investors.
Stay tuned for more about El Paso as we re-analyze our position after earnings and the ex-dividend date. However, current shareholders should hold tight. We expect EPB’s share price to continue to rise, based on strong earnings and its competitive dividend rate. Prospective investors should buy El Paso on any dip. El Paso has been another big winner for Stocks on Wall Street and proof that energy stocks still have something left in the tank.