The New Phonebooks are Here!
The “Top Picks” season has begun for 2019 stock market recommendations. While some of us have backgrounds in fundamental analysis, most of us at OppTrader are active traders placing positions based on events, special situations, and correlations. For that reason, these reports are extremely informative. – VBL
Top Picks Make for Active Stocks
Simply put: if an investment firm is recommending a stock for purchase, then when 2019 allocations start coming in to money managers, CTAs , and wealth managers, these stocks will be in play. If every firm on Wall Street is recommending to buy Google, then one would expect Google to outperform in Q1 2019 by the simple fact that everyone is buying it. We like to see how well-touted stocks actually perform when given the thumbs up by analysts. And we especially like it when a highly ranked stock which should be rallying by virtue of clients plowing into it on their advisors’ say-so does not rally. Those are the ones that wet our whistle.
Earning Trades Writ Large
This approach is not unlike watching how a stock reacts on earnings. The main differences between the earnings reaction trade, and the “Top-Pick” trades are complexity and time. Earnings trades can be very complex with companies and analysts doing dances days before the release; managing expectations, short term market cash-flows etc. Earnings trades are over quicker.
Conversely, “Top Pick” trades are much simpler. Firms recommend stock, clients are advised to buy stock. To the extent that the stock rallies during the Q1 allocation period, that is an idea of bias for a short term trader’s daily activity. For those who take positions a little longer OR look for that last rally after that very last share has been bought for clients… those can be great shorts.
We do this frequently in commodities like Oil and Gold where the allocation recommendation and resulting flow is more transparent. However, the equity markets offer a much larger universe of choices. For that reason, we favor this type of allocation/flow trading in the stock market. It may not be as easy to see, but there are so many chances to play.
Silence Speaks Volumes
We like Credit Suisse as a research firm. That is because we have used them for years when we were managing money at a NY $BB macro fund. We got familiar with how to read between the lines. The absence of Apple as a top buy recommendation for one thing in this report. The 98 “outperform” ideas juxtaposed with only 7 “underperform” ideas, for another. That is not shocking to us, but it serves as a reminder that 2007-2008 is fading fast as a lesson to analysts.
For us, it is that”negative space” that matters. Who isn’t mentioned? Those ignored stocks are of interest to us as parts of paired trades. For example: If Amazon and Google are recommended, then maybe there is a re-allocation play that involves managers booking Apple profits and rolling that into Amazon. Because let’s face it, if the world is long Apple, one doesn’t simply call them an “underperform” and stay in business very long.
Allocation season gives many ways to slice the market up. When it comes to trading flow: Surf it or fade it… but do indeed trade it. Here are a couple summaries of stocks we watch at OppTrader
Thesis: Our Outperform investment thesis for GOOGL remains predicated on the following factors that can potentially
drive material increases to our current estimates and hence share appreciation: (1) Ongoing monetization
improvements in Search advertising through product updates such as Expanded Text Ads and Individual Bid
Adjustments, (2) Greater-than-expected revenue contribution and margin expansion within Google’s larger nonSearch
businesses—namely YouTube (Bumper Ads) and Google Play (App Install, Sponsored Ads), (3) Optionality,
upward bias to estimates, and long-term shareholder value creation from new monetization initiatives such as Maps
as well as the eventual commercialization of Google’s Other Bets.
Potential Catalysts over next 3-6 months: Fourth quarter earnings.
Valuation: We use the discounted cash flow (DCF) method to calculate our $1,375 target price for Google.
We maintain our Outperform rating for AMZN, and factors that can provide potential upside to our estimates include:
(1) re-establishment of e-commerce segment operating margin expansion as Amazon grows into its larger
infrastructure, (2) ongoing margin benefit due to shipping loss moderation, and (3) Capital intensity to run AWS is
leveling off, as we anticipate usage rates have dropped below 100%. This will augur flattening nominal capex dollars
(including that acquired through capital lease) and free cash flow expansion
Drivers to our investment thesis and Outperform rating include: (1) Facebook will be able to drive long-term revenue
growth without a material lift in ad loads, with near-term growth drivers including Instagram, Premium Video, and DPA
(via price inflation for core mobile/desktop newsfeed) (2) Street models continue to underestimate the long-term
monetization potential of upcoming new products (Graph Search) (3) optionality and upward bias to estimates, which
do not contemplate contributions from multiple other products including Messenger and WhatsApp
Thesis: MRO’s divestiture of its Canadian oil sands mining business coupled with two Permian acquisitions last year
sharply improved the company’s portfolio, a dynamic we believe is still underappreciated by investors. Meanwhile,
MRO offers one of the most attractive oil and cash flow per debt-adjusted share growth profiles among the global
E&Ps, driven by the combination of attractive absolute growth and free cash flow assuming just $50/Bbl. We also
believe MRO’s “stale” US resource potential and drilling location guidance are conservative and see upside potential
to these figures (and thus NAV) without it pursuing another acquisition.
Potential Catalysts over next 3-6 months: (1) accelerated pace of share repurchases (recently commenced
buybacks in 3Q18), with potential upside to its current $1.5 billion authorization given increased organic FCF visibility;
(2) US onshore resource update: at last update, MRO estimated its Big-4 resource plays to hold 2P resource potential
of ~4.4 BBoe with upside to >6.5 Bboe vs. our current estimate of ~4.3 BBoe; and (3) disclosure of Northern
Delaware type well economics.
Valuation: MRO still trades at a steep >1x discount to peers on 2019-20 EV/DACF, which we note is even wider than
its historical average discount to the group when it had its Canadian oil sands mining business and before it acquired
its Permian position (high multiple assets). MRO also trades at a moderate discount on P/NAV.
Thesis: WPX stands out as having the most differentiated Permian takeaway portfolio in the SMID E&P space which
provides protection from widening Mid-Cush basis—a key investor concern. Moreover, shares have historically
traded at a discount in-part due to an elevated leverage profile vs. peers; however, assuming strip pricing we see
WPX reaching CF neutrality in 2019 and forecast 2018/19 net debt leverage at 2.4x and 1.5x (CS price deck),
roughly in-line with peers at 1.9x and 1.5x, respectively. Lastly, shares offer a differentiated 2017-2022 cash flow per
debt-adjusted share CAGR of 39% versus peers at ~27%, assuming strip pricing.
Potential Catalysts over next 3-6 months: We see Bakken upside from continued strong performance from wells
drilled on their North Sunday Island position, we also see NAV upside from continued delineation of their Permian
position by WPX and peers focused on Bone Spring, Wolfcamp, and Avalon. Lastly, we see monetization of
midstream assets as adding yet another near-term catalyst.
Valuation: Our $23 target price is based on a blended average of 7.0x normalized 2019 EBITDX and ~0.8x our
Thesis: While memory is still cyclical, we see the current environment as more sustainable for three reasons:
(1) Suppliers are becoming more rational with capacity additions, (2) The cost of capacity is structurally increasing,
and (3) New applications around Data Analytics, AI, and AD are driving sustainably higher demand. With supply
growth structurally slowing and memory becoming more important/strategic to compute applications—we continue to
see an upward bias to shares.
Potential Catalysts over next 3-6 months: F4Q earnings likely to continue to demonstrate upside to Rev/EPS and
sustainability of margins.
Valuation: The stock currently trades at 4.8 times CY19 P/E and 5.0 times CY19 EV/FCF despite: (1) more
sustainable fundamentals, (2) turning net cash positive in F3Q, (3) $2.0-2.5 bb of FCF/Q, (4) an anticipated ~$1bn
buyback beginning in September, and (5) at least $9 bn of operational improvements since the FY16 trough implying
trough EPS of ~$6.50.
Thesis: JPMorgan represents the value inherent in the universal banking model–best-in-class execution—leveraging
its complete, scaled and well-integrated product set to drive profitable and sustainable revenue growth. Add to that a
willingness to drive down unit operating costs (capacity for investment to drive incremental growth; a virtuous circle)
and an ability to optimize capital; this sustains better-than-average earnings growth and ROEs.
Potential Catalysts over next 3-6 months: (1) Regulatory relief (Volcker, CCAR, GSIB surcharge) and (2) Material
longer term, opportunities to consolidate market share in the highly fragmented retail and middle market commercial
banking businesses to drive above average earnings growth and sustain above average returns.
Valuation: We arrive at our $130 target price applying our weighted average valuation methodology (using a 35%
weight on our Blue Sky scenario, a 50% weight on our base case scenario, and a 15% weight on our Grey Sky
scenario), our target price of $130 translates to 1.8x year-end 2019 book value (2.2x P/TBV).
We rate AXP Underperform, as we believe rewards competition will pressure returns, and rising loss provisions will
dampen earnings and valuation, leading to total returns lower than the typical stock in our coverage. Continued
escalation in rewards competition (particularly within T&E segment) and high provision growth in 2019 will be
catalysts for our thesis.