By John Kimelman
The stock market may be bouncing back after a pulse-quickening
few weeks. But the recovery in the price of oil has been far more
tepid.
In recent weeks, falling energy prices have punished shares of
companies in oil services, exploration and production, and
refining.
But according to StreetAuthority's David Sterman, certain
refiners appear to be babies in the tossed-out bathwater of weak
energy prices.
"Investors are dumping refinery stocks, even though the broader
operating backdrop for these firms is actually improving," writes
Sterman. "Investors now have a chance to profit -- before the crowd
catches on."
As Sterman explains it, to understand profit margin trends for
oil refiners, one needs to understand the impact of price
differences in the United States -- West Texas Intermediate is the
benchmark -- against the rest of the world, which uses the Brent
crude benchmark.
Sterman writes that European refineries, which ship gasoline and
diesel to U.S. shores, must use the pricier Brent crude. "U.S.
refiners, meanwhile, can undercut the importers whenever the gap
between West Texas and Brent prices widen.
"That figure has recently widened back to $5. And according to
Citigroup, the gap may grow further. They recently boosted their
price targets for refiners on our view that crude differentials
will widen on the back of growing North American production and a
lack of any major change in oil export policy in the near future,"
Sterman writes.
Investors interested in U.S. refiners, writes Sterman, might
want to consider yield-rich Alon USA Partners (ticker: ALDW) or
HollyFrontier ( HFC).
Alon, he writes, should be able to generate a $2.64 dividend
payment in 2015, according to Citigroup forecasts. "That's a 15%
yield, based on current prices. Citigroup's $22 target price adds
25% potential share price appreciation to that income stream."
Sterman also likes HollyFrontier, which has established a track
record with shareholders, delivering buybacks, regular dividends
and special dividends. "A current $500 million buyback plan is in
place now, and investors should look for more special dividends in
2015," he adds.
He refers to a Barclays report on the refinery sector, which
concludes: "We believe the U.S. refiners remain significantly
undervalued. In our base case scenario, we estimate the group's
average potential upside at 53% over the next couple years."
But while refiners look enticing, the same can't be said for
biotechs that have gained attention lately for efforts, both real
and hyped, to help fight Ebola.
In a piece for The Street on Tuesday, veteran biotech writer
Adam Feuerstein thinks that this sector, despite its fall in recent
days, is still overpriced and could provide further disappointment
as the fundamentals of these stocks outweigh the public fears
buoying this sector within the biotech sector.
For example, he writes, shares of iBio ( IBIO) have jumped
strongly since early September on speculation that its plant-based
antibody manufacturing technology would play a big part in ramping
up production of ZMapp, the experimental Ebola drug already used to
treat several infected patients before supplies ran out. "The truth
is more sobering: iBio is a tangential player in one of several
ZMapp manufacturing plans under consideration. The odds of iBio
generating meaningful revenue from ZMapp are small relative to the
company's almost $200 million market value," he writes.
Finally, anyone who needed a reminder that the term "hedge fund"
is one of the greatest misnomers in the English language should
read a piece in Tuesday's Wall Street Journal about the big
performance dive that many leading funds have taken thus far in
October.
Many investors supposedly buy hedge funds because they will
behave differently than a regular long-only stock portfolio. That
means, when stocks fall, these funds should, if not gain value, at
least have more subdued losses.
But while stocks were falling hard in October before this week's
recovery, many brand-name hedge funds were falling even harder,
according to the Journal.
Many leading hedge funds are simply unregulated long-only
portfolios that rarely hedge in an effort to lessen portfolio
declines. And the unofficial return numbers leaked to the Journal
show that reality quite clearly.
According to the Journal, top firms including Jana Partners,
Discovery Capital Management and Paulson & Co. have posted
losses ranging from 5% to 11% for the month, according to
investors.
In the article, Brad Alford, a manager with Alpha Capital
Management, an Atlanta-based investment firm, attributed some of
the losses to funds crowding into the same stocks and rushing out
at the same time.
According to the Journal, Paulson's Advantage Fund was down
nearly 11% for October through a week ago last Tuesday, bringing
the $21 billion firm's losses in that fund for the year to nearly
22%, according to data from Lyxor, the wealth-management arm of
Société Générale that invests client money in hedge funds.
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