Monday Mailbag: Energy Survivors, Tech Small Caps, Boeing’s Big Bounce
Instead of watching bloviators on CNBC, I prefer watching baseball on ESPN. How bad is the advice on the cable business gabfests?
Set the way-back machine to the financial crisis of 2008. As Bear Stearns was floundering in March of that year, I distinctly remember financial TV celebrities insisting (shouting, actually) that the investment bank was “fine” and investors shouldn’t take out their money.
We all know how that turned out.
These alleged analysts on television are really actors who appeal to short attention spans by expressing views crisply, cleanly, concisely, confidently, and with plenty of snappy sound bites. Nuance is verboten because it’s boring and hurts ratings. When these performing seals start barking and clapping their flippers, don’t take it as a cue to call your broker.
Sad fact is, most people aren’t shrewd consumers of news and they tend to take media pronouncements at face value. That’s one reason why your letters to the Investing Daily Mailbag are so important: they represent direct communication, without intermediaries, filter or spin.
Let’s see what came over the transom in recent days.
Refining stocks on fire…
Regarding my July 19 issue, Marathon Is Ready to Break into a Sprint, several readers asked about “survivor stocks” in the struggling energy sector. Here’s an indicative question:
“What’s your take on MPLX? Is it just as good an investment as MPC? I’m thinking that as more refined products are produced at lower prices, this should benefit both companies.” — Peter K.
Marathon Petroleum’s (NYSE: MPC) subsidiary MPLX LP (NYSE: MPLX) is indeed an appealing investment and your thinking is correct.
MPLX, a master limited partnership (MLP) that operates midstream energy infrastructure assets, faces a promising second half of 2017. MPLX just reported robust operating results and the analyst consensus is that it should generate a compound annual distribution growth rate of at least 20% for the next two years.
Parent company Marathon Petroleum engages in refining, marketing, retailing, and transporting petroleum products primarily in the U.S. It operates through three segments: Refining & Marketing, Speedway, and Midstream. Just as refiner Marathon should benefit from lower oil inputs for its refining business, MPLX should benefit from consistently prolific North American shale production.
The energy sector’s two-year downturn leading up to the second half of 2016 compelled shale producers to run as efficiently as possible, so they could stay profitable even under low oil prices. That’s good news right now for MPLX, which relies on financially sound producers that can afford to pay for its midstream services.
In reference to my July 19 article on Marathon Petroleum, I received these additional reader messages:
“I just read your article about the energy markets and refiner Marathon and your assessment about OPEC’s waning power is right on the money. Maybe the Saudis will think twice before starting another price war!” — Paul L.
Paul, it’s true that the once dominant House of Saud has wounded itself with its own machinations, by launching an ill-conceived price war and then proving unable to reverse it. Further petard hoisting lies ahead.
“Is it time to jump on board with CVX in addition to MPC? I don’t want to load up too much on energy but Jim Pearce likes it as a core holding. My concern with it is that it has been in a downtrend since 12/22/16 and I don’t want to try and catch a falling knife. Jim has support around $100 and I have been watching and waiting.” — Rick W.
Rick, I agree with the assessment of my colleague Jim Pearce, chief investment strategist of Personal Finance. I also like “Super Major” Chevron (NYSE: CVX). Since Chevron was added to the PF Growth Portfolio on March 28, 1990, the stock has generated a total return of 1,708.%.
Chevron stands out for its diversification and prudent management of debt. With a market cap of $198.7 billion, CVX boasts a mix of assets, including liquefied natural gas, deepwater fields spread around the world, shale plays in North America, and downstream activities such as refining and retailing. The latter downstream assets confer high margins and help cushion the company from this year’s oil price slump.
Compared to the red ink that continues to mar the operating results of many energy producers, Chevron’s profits are holding up comparatively well. Chevron is scheduled to report second-quarter fiscal 2017 earnings on July 28. The integrated energy giant is likely to post year-over-year growth in its upstream and downstream earnings. The average analyst consensus is that CVX’s earnings per share (EPS) will come in at 93 cents, compared to EPS of 48 cents in the same year-ago quarter. CVX is a solid energy play, with an enticing dividend of 4.32%.
Betting on the small fry…
“I enjoyed your July 20 article. You recommended two small- to mid-cap electronics companies, Astronics and Esterline. I’ve been looking at Cemtrex, another small-cap electronics stock that seems promising. What’s your take?” — Alex Z.
Alex is referring to my article Forget FANG and Buy These “SMID” Stocks Instead.
Cemtrex (NSDQ: CETX) is a global provider of electric system assemblies, instruments and emission monitors for industrial processes and environmental control systems. With a market cap of $37 million, this stock is only for aggressive investors with an appetite for risk.
In addition to the hot field of electronics, Cemtrex is plugged into the growing “green” economy. The company provides monitoring instruments for environmental compliance, and equipment for controlling particulates, hazardous pollutants and greenhouse gases used in multinational carbon trading.
Cemtrex was added in June 2017 to the Russell Microcap Index, which measures the performance of the micro-cap segment of the U.S. equity market. The index is tracked by BlackRock’s (NYSE: BLK) exchange-traded fund, the iShares Micro-Cap ETF (IWC).
On May 11, Cemtrex reported a 61% year-over-year increase in total revenue to $30.5 million for the second quarter of fiscal year 2017. Total revenue for the six months ended March 31 came in at $59.9 million, an increase of 86% compared to $32.2 million for the same period in 2016. For the first six months of 2017, earnings jumped 20% to $1.8 million or EPS of 18 cents compared to $1.5 million or EPS of 19 cents for the same period in 2016.
Growth momentum appears to be in the cards for CETX. The average analyst expectation is that the company’s annual sales will soar 140.5% next year, on a year-over-year basis, as its backlog of orders starts to bear fruit.
Small stocks as a whole should outperform their larger peers this year, as economic growth continues and President Trump pursues tax cuts advantageous to entrepreneurial firms. Small caps also are growing their top and bottom lines at a generally faster pace than their larger counterparts. But again, be forewarned: CETX is a micro-cap and as such, it’s risky.
“What’s your view on Boeing?” — James R.
I love this stock. Boeing (NYSE: BA) has been a blue-chip star in 2017, gaining more than 35% year to date. I think shares have further to run.
Boeing is a brand-name behemoth boasting inherent strengths that make the stock a solid long-term growth proposition. With its existing fleet of well-regarded civilian aircraft in addition to the game-changing Dreamliner, Boeing is positioned to benefit from the aircraft sector’s renaissance.
As the global economy recovers, increasing numbers of people are buying airline tickets, which in turn is prompting airlines to upgrade their fleets. As a maker of combat jets, Boeing also is a great play on the big defense build-up under President Trump. Boeing sells many sophisticated fighter jets that are staples in U.S. fleets and rising developing nations, notably the F/A-18 E/F Super Hornet.
For more detailed analysis of Boeing’s prospects, see my June 23 issue in which I discuss how Boeing dominated this summer’s Paris Air Show.
Got any questions or comments? Drop me a line: email@example.com. You also can post a comment at the bottom of any Investing Daily article in the Stock Talk section. — John Persinos
Gold will shine through…
Aerospace/defense giant Boeing benefits from rising geopolitical risks, which also are driving many investors to the classic portfolio hedge of gold. The yellow metal will shine amid today’s uncertain climate.
During Donald Trump’s anxiety-producing presidency, many analysts are predicting “gold mania” this year and beyond. Indeed, the pessimists are coming out in force, with many expecting a market correction, if not an outright bear market, in 2017.
To be sure, the broader stock market continues to hit new highs, but potential triggers for a financial crash abound. That’s why gold is on the cusp of astronomical gains. The price of gold could reach as high as $20,000/oz, allowing investors gains that could turn a $500 investment into $5,000.
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