Who would have thought, but for the first time in many years, it’s the American Economy that is getting all the positive attention. Some of the positive change is related to the precipitous fall in oil prices but more of it relates to improved ecoonomic policies and the ability of the American economy to adapt. Liberum Research has been predicting positive news for the American Economy over the last two years. Most of our predictions have been primarily based on the overall growth trend in executive turnover and the slowly improving employment situation. The latest executive turnover numbers, while not fabulous, continue to support positive growth for the American Economy. The economy is still faced with serious employment problems, particularly for the long term unemployed, and a continuing drag in salary increases for the majority of the working population. Increases in executive turnover, which Liberum Research sees as an important economic indicator, have remained on a constant positive trend. Liberum expects executive turnover to continue in a positive direction as we move through the new year.
Schlumberger Limited (SLB) remains one of the stronger oil and gas service companies despite pressures stemming from falling commodity prices and geopolitical disruptions around the world, says Edward C. Muztafago, Director of Investment Research at Societe Generale.
“The sanctions in Russia have been rather problematic, some of the areas of disruption in the Middle East — but all in all, if you look at Schlumberger’s business, they continue to perform quite well, and particularly in markets like the offshore Gulf of Mexico, where you are starting to see a bit of a return to the development of lower tertiary work, which is very service-intensive,” Muztafago said.
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The falling price of oil is expected to slow spending down, but as exploration activity decreases by the part of oil and gas E&Ps, SLB is expected to pull through thanks to its limited exposure to that segment.
“The one area where Schlumberger is seeing some weakness certainly is in the seismic business, and one that is driven by the pullback in exploration activity. Seismic for Schlumberger has become a reasonably small part of their revenue stream, probably about 7% by our estimates. The confusion that some people have had that seismic is going to be a tangible headwind on Schlumberger I think is a little bit of a false read,” Muztafago said.
Analyst Timothy Coffey of FIG Partners says that First Republic Bank (FRC) is an example of how Western banks are dealing with the current regulatory environment. He explains the strategy First Republic is executing in terms of complying with regulations.
“The best example of that is First Republic. First Republic is going to be getting close to $50 billion, and in the second quarter of this year decided to get very, very aggressive and to set up the compliance infrastructure to support assets well in excess of $50 billion,” Coffey said.
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Coffey says that for a lot of shareholders and market players, and likely for First Republic itself, they were surprised at how much was needed to get done to ensure compliance issues were met.
“First Republic, for a bank of its size, is very simple. They don’t have a bank holding company, and they don’t do esoteric product offerings. It’s very, very vanilla, and yet the regulators apply the same rigid structure of compliance that they would have to put on a bank that had a prop trading desk or was heavily involved in forex,” Coffey said. “As a result, you’re seeing banks take the regulatory responsibilities that come with higher assets much more seriously than I think they did before.”
Senior Analyst Jennifer Thompson of Portales Partners says there are opportunities to be found within the large-cap regional bank universe. She says it is important to focus on banks that have the ability to gain market share and improve returns on equity over time, and points to Wells Fargo & Co (WFC).
“The company has significant market share in not only their core banking business, but also a number of their fee businesses. That market share dominance has enabled them to take market share at a time when other banks are struggling. Market share dominance, a reasonable risk profile and diversity in the revenue stream are helping them to stand out from the crowd,” Thompson said.
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Thomspon says there are other things that separate Well Fargo from its peers; for example, they are the number one, two or three player in each business they operate in.
“It’s scope, it’s scale, and it’s market share, but it’s also execution that separates them from their peers. They have proven their ability to gain market share with a reasonable risk profile throughout the business cycle,” Thompson said.
Director Richard D. Weiss of Janney Montgomery Scott has rated Investors Bancorp, Inc. (ISBC) an “outperform” due the company’s ability to transform itself from a pure thrift to a more commercial-like bank.
“[Investors Bancorp] is an interesting stock. Earlier this year, they did a second-step conversion, whereby approximately $2 billion of equity capital was raised,” Weiss said. “It trades around 105% to 110% of tangible book value. The company has a great deal of capital. In the past, they have done acquisitions, but for now they are sitting tight.”
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Weiss considers Investors Bancorp a thrift success story, and says the company has unique features that make it difficult for others to replicate.
“One aspect is the patience and willingness of management to achieve success over the long term. Investors was fairly large when it did the second-step offering and raised a great deal of money — that would be hard to replicate,” Weiss said.
Minyi Chen, COO and CFO of TrimTabs Investment Research, says Viacom, Inc. (VIAB) has been using profits from its competitive entertainment content to continue buying back stock.
“[A] company which has been in the portfolio for a while is Viacom. They produce movies, media or entertainment content. They’re a very huge buyer of their own stock,” Chen said.
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Chen says that if Viacom continues the current pace of buying back their own shares, they could retire over a quarter of their existing share supply in the next three years.
“That is huge in terms of float shrink,” Chen said. “They have been doing quite well in the past five years by providing very competitive entertainment content like movies, television and video games on the market, and they were able to use that money to buy back their shares, and they continue to do so as a form of continued profit distribution to shareholders.”
Senior Managing Director Gregory Phelps of John Hancock Asset Management says his firm has a large holding in Northeast Utilities System (NU), which he says is one of the best in the industry as a largely transmission distribution utility.
“We actually have a fairly big holding in that because we owned both the common stock of Northeast Utilities and the common stock of NSTAR, which was Boston Edison before they merged a couple of years ago. We liked both companies very much,” Phelps said.
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Phelps says he likes Northeast Utilities‘ growth because the company has a lot of transmission projects they are working on, and transmission lines tend to have higher allowed return on equity by regulators. Additionally, they have announced a major natural gas pipeline project which brings gas from the shale plays in Ohio into the Northeast.
“So the company is really focusing on building out energy infrastructure, which carries very nice allowed return on equity by regulators. To us that’s the epitome of a very low-risk-type utility that has above-average earnings growth and dividend growth,” Phelps said.
CEO Phillips Baker of Hecla Mining Company (HL) says his company is experiencing real tailwinds with successes at three of its mines, and that the outlook for said mines is extraordinary as they continue to produce great cash flows while growing and adding reserves and resources.
“At the Lucky Friday, we’re continuing to develop this shaft that will change that mine in the long term. Because the grade increases as we go deeper at that mine, Lucky Friday will go from being a 3-million-ounce silver producer to a 5-million-ounce producer. This deeper, higher-grade production is a huge improvement, turning a good mine into a very good mine,” Baker said.
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Hecla Mining is also seeing great results at other places, Baker says, such as Greens Creek and Casa Berardi.
“Over the last three years — and I’ve been with the company for 13 years now and watching Greens Creek closely for that time — we have actually had our best drill results I have seen. And so the outlook for that mine and the likelihood of further increases in the resource and the reserve base is quite high,” Baker said.
“Finally, at Casa Berardi, we’re seeing the strong exploration success that we expected when we made the acquisition…It is a very, very exciting place to be operating and to be exploring,” Baker added.
Equity Analyst Kristoffer Inton of Morningstar says Agnico Eagle Mines Ltd (USA) (AEM) is well-positioned for meaningful production growth in 2015, and is a miner investors should be looking at.
“We also like Agnico Eagle. Agnico Eagle doesn’t have the lowest costs in the industry like Eldorado does, but its costs aren’t bad at roughly $900 per ounce on an all-in sustaining cost basis. These are still some of the lower costs in our coverage universe,” Inton said.
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Inton expects Agnico to produce approximately 1.6 million ounces in 2015, compared to 1.1 million ounces last year.
“[This is] largely driven by the jointly acquired Canadian Malartic mine and expansion at existing mines. We think Agnico Eagle, given its decent cost structure and attractive growth profile, is a miner worthy of consideration,” Inton said.
Morningstar Analyst Kristoffer Inton likes Barrick Gold Corporation (USA) (ABX) because the company’s core mines all operate at low cost, but he does believe investors need to consider the company’s lack of a growth pipeline and shakeup in management.
“Barrick Gold is the largest gold miner in the world by production. It’s anchored by five core mines that roughly constitute 60% of production. These mines all operate at low cost and are very large,” Inton said.
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Inton says that overall Barrick operates at attractive all-in sustaining costs, and the core mines operate at costs below the company average. He says that helps anchor the company’s free cash flow generation in the long term. However, Inton says investors need to keep an eye on a few things going on at the company.
“First, despite its low costs, Barrick doesn’t have a significant growth pipeline. This primarily has to do with the fact the company suspended its megaproject Pascua-Lama in the Andes Mountains,” Inton said. “Without that project, Barrick’s growth pipeline is not as promising as it once was.”
“Second, senior leadership has changed a lot this year. John Thornton was appointed as Chairman, and he appears to have full control of Barrick’s strategy…Although we think Thornton controls Barrick’s strategy, we’re still waiting to see what that strategy is,” Inton added.
