“Intermediaries could be a positive catalyst for equities,” says RBC. Here are 2 names with at least 70% upside
Covering the stock market scene for RBC Capital, head of US equity strategy Lori Calvasina identified the upcoming US midterm elections as a major positive catalyst for equities towards the end of the year. It may seem counterintuitive – US politics being anything but positive these days – but Calvasina makes a strong case for a market rally in the fourth quarter.
“The midterm reviews are a potential positive catalyst later this year. Not only do stocks tend to rally in the 4th quarter of midterm election years, but Congress is expected to return to Republican control, which is good news for equities since the S&P 500 tends to post its strongest returns in years that have a Democratic and divided president or Republican congressional control,” Calvasina explained.
Against this backdrop, Calvasina’s colleagues among RBC equity analysts have picked two stocks they see as strong winners in the months ahead – winners of 70% or more. We researched these stocks, using the TipRanks platform, to find out what sets them apart.
Freedom of Energy (LBRT)
RBC’s top pick is Liberty Energy, an oil services company in the North American hydrocarbon sector. Petroleum services are the support services required by producing companies to extract oil and gas resources from the ground. Producers find the oil and drill the wells; service companies, like Liberty, provide the necessary support: engineering know-how in the water, sand, chemicals, piping and pumping needed for efficient fracturing operations.
Liberty operates in some of the richest energy producing regions in the United States and Canada, including the Appalachian gas formations of Ohio, West Virginia and Pennsylvania, as well as oil and gas fields of the Gulf Coast, the Great Plains and the Rockies. In all, Liberty is present in 12 US states and 3 Canadian provinces.
Oilfield support has notoriously high costs, and Liberty posted a consistent net loss through the second quarter of this year. In its 2Q22 financial release, Liberty reported diluted EPS of 55 cents. This compares favorably to 1Q22’s 3 cent loss, and even better to 2Q21’s 29 cent loss. The profit came from high incomes; revenue increased 62% year over year to $943 million, the highest level in the past two years.
These results, notably EPS, exceeded expectations. EPS had been forecast at 17 cents; the reported 55 cents was more than triple that value. Liberty shares have also outperformed this year; where overall markets are down near bearish territory, LBRT gained 45%.
The company’s outperformance is a key driver for 5-star RBC analyst Keith Mackey, who writes, “Liberty’s 2Q22 results were well above our expectations for activity levels and high prices. We believe the investment case for Liberty has become increasingly compelling… In our view, Liberty should trade at a premium to most pressure pump companies in our hedging group due to its size , its solid balance sheet and its broad exposure to the main North American basins.
By “premium”, Mackey means 73% upside potential. The analyst gives LBRT shares a price target of $25 to support its outperform (i.e. buy) rating. (To see Mackey’s track record, Click here)
Wall Street appears to largely agree with Mackey, as Liberty shares retain a strong consensus buy rating from analysts. There have been 8 recent analyst analyses, including 6 buys and 2 holds. The $22.38 mid-price target for the stock implies approximately 59% upside potential from the trading price of $14.11. (See Liberty stock forecast on TipRanks)
Callon Petroleum (CPE)
RBC is a Canadian investment bank, and Canada is a leader in the global energy market, so it’s no surprise that the company’s analysts are watching North American energy companies closely. Callon Petroleum is one of the industry’s independent operators, with its base in Houston, Texas, and acquisition, exploration and extraction activities in the Permian Basin and Eagle Ford Shale formations. of his state of origin. The company’s assets include approximately 180,000 net acres spread across the two regions.
Callon won’t release its second quarter numbers until tomorrow, but we can get an idea of the company’s performance by looking at the first quarter. Looking back, we should keep in mind that last fall Callon completed its acquisition of Primexx’s leasehold interests and oil, gas and infrastructure assets in the Delaware Basin. The transaction, made in shares and cash, was valued at $788 million. At the same time, Callon divested non-essential acreage in the Eagle Ford game, for a total of $100 million.
With that in the background, we see that Callon reported total hydrocarbon revenue of $664.8 million in the first quarter, more than double the revenue of the prior year. This supported strong adjusted EPS of $3.43 per diluted share – again, this was more than double the 1Q21 result. Callon’s results, both top and bottom, have shown steady growth since the second quarter of 2020, reflecting both the return to business as pandemic shutdowns ease and rising oil and natural gas prices in open markets.
In an important point for investors to note, Callon carries heavy debt, including $712 million, nearly half of the $1.6 billion limit on the company’s secured credit facility. The company generated free cash flow in the first quarter of $183.3 million and openly worked to deleverage its balance sheet.
According to Scott Hanold, another of RBC’s 5-star analysts, CPE has significantly underperformed its peers over the past year, which opens up an opportunity for investors.
“CPE shares have significantly underperformed over the past year due to investor scale/shareholder return preferences, but also as a result of the acquisition of Primexx. acquisition exceeded our expectations and deleveraging continues to happen faster than expected.We believe this positions CPE as one of the most attractive SMid caps in our coverage,” Hanold explained.
Consistent with his bullish stance, Hanold rates the CPE as an outperformer (i.e. the buy), and his price target of $75 implies ~70% upside potential over the next 12 months. . (To see Hanold’s track record, Click here)
Overall, as RBC trends to the bullish side, the street looks more cautious. There are 8 recent analyst analyzes on Callon, and they break down into 3 buy, 4 hold and 1 sell – for an analyst consensus hold rating. The average upside remains high, however, as the shares are selling for $44.18 and their average target of $76.25 indicates around 73% upside potential. (See Callon stock forecast on TipRanks)
To find great ideas for energy stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a recently launched tool that brings together all of TipRanks’ stock information.
Disclaimer: The views expressed in this article are solely those of the analysts featured. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.