Are the markets at nosebleed heights, or getting ready to ‘flatten the curve?’ The S&P 500 has just set a new all-time high, as has the NASDAQ; the Dow Jones has found resistance at the 28,000 level, a mark that felt like fantasy just one year ago. The market gains have outpaced the pundits’ collective wisdom, leaving old predictions far behind.
From investment bank Goldman Sachs, strategist David Kostin has raised his year-end outlook for the S&P, writing of the market’s prospects, “…a falling equity risk premium will outweigh a rise in bond yields, and combined with our above-consensus EPS forecast, will lift the S&P 500 Index to 3,600 by year-end.”
Kostin admits that the market’s current strong gains have caught him by surprise, as he had expected more gradual gains as the coronavirus crisis receded. Conditions today – in the stock markets, and in the monthly unemployment numbers – suggest that the economy is experiencing a V-shaped recovery, with a fast rebound from the late-winter swoon.
In addition to Kostin’s look at the macro situation, analysts from Goldman Sachs have also been diving into specific stocks. Of particular interest, we’ve pulled the TipRanks data on two stocks that the firm predicts will show powerful double-digit growth in the second half. And just for contrast, we’ve included one that Goldman says to avoid. Let’s look at the details.
Magnolia Oil & Gas Corporation (MGY)
Magnolia, the first stock on our list, operates in the Eagle Ford formation of South Texas. This rich oil-bearing formation is prime ground for hydrocarbon exploration, and Magnolia has exploration and production rights on 456,000 acres in the region.
The company was hit hard during 1H20, with the lockdown policies striking from two directions: by directly impacting production, and by hurting overall demand for oil. Magnolia reported negative earnings in both Q1 and Q2. In a bright spot, however, Magnolia’s balance sheet remains strong. The company came out of Q2 with $116.9 million in cash on hand, and an undrawn $450 million credit facility. Current debt is manageable, as there are no maturities until 2026.
The balance sheet was on Goldman Sachs' Umang Choudhary's mind when he wrote, “We believe MGY has a unique combination of differentiated FCF and best-in-class leverage underpinned by management’s longstanding disciplined capital allocation strategy; we see 14%/17% FCF yield in 2021/22 and net cash position in 2021.”
In line with those comments, Choudhary rates MGY a Buy, with an $8 price target to indicate a potential upside of 27% in the coming year. (To watch Choudhary’s track record, click here)
Overall, the analyst consensus rating on Magnolia is a Moderate Buy based on 5 Buys and 4 Holds. Shares are selling for $6.27, and the $7.94 average price target suggests a one-year upside of 27%. (See MGY stock analysis on TipRanks)
PDC Energy (PDCE)
The second Buy recommendation from Goldman’s Choudhary is PDC Energy, a producer and distributor of oil, natural gas, and natural gas liquids, with production ops centered in Colorado and Texas. After turning sharply negative in Q1 2020, PDC’s earnings bounced back strongly in the second quarter.
EPS came in positive, and at 14 cents per share was far above the 24-cent loss expected and the 98-cent loss seen in Q1. Production reached 17.2 million barrels of oil equivalent, and the free cash flow came in at $62 million. Reflecting the positive operations, company management also revised the 2020 full-year guidance, setting a higher bar. The new guidance figures point toward $300 million in free cash flow for the year, along with an increased production figure in the range of 175K to 185K barrels of oil equivalent per day.
Strong cash flow and the increased 2020 guidance informed Choudhary’s opinion of PDC. He wrote of the company, “We believe PDCE will have above-consensus FCF in 2021… we believe the company can likely meet its debt target of less than $1.5 bn in 1H2021. Following completion of its leverage objectives, we see potential for the company to deploy FCF towards fixed/variable dividends and resumption of its existing share repurchase program…”
Choudhary sets a $20 price target on PDCE shares, backing a Buy rating and implying a 28% growth potential for the year ahead.
PDC Energy’s Strong Buy analyst consensus rating is based on 11 reviews, including 10 Buys and just 1 Hold. The stock’s $21.20 average price target suggests a 36% upside from the $15.56 trading price. (See PDC Energy’s stock analysis at TipRanks)
Comstock Resources (CRK)
Last on the list today is a third energy company, Comstock Resources. This company has over 5 billion cubic feed of proven natural gas reserves in the Haynesville and Bossier shale formations on the Texas/Louisiana border, and was producing 756 million cubic feet of gas at the end of 2019.
After seeing quarterly earnings grow through the latter half of 2019, Comstock was hit hard by the coronavirus crisis. Sequential drops in earnings in Q1 and Q2 brought EPS down to just 1 cent, and pushed earnings below $180 million – more than $100 million below the Q4 2019 level. Even though demand is starting to return, and production levels are increasing, lower prices in the oil and gas markets are continuing to put pressure on Comstock’s bottom line.
The company has started taking on new debt to compensate, with an add-on offering of senior notes closed out earlier this month. The notes, at 9.75% and due in 2026, totaled $300 million, with proceeds to be used to repay outstanding debt to Comstock’s bank credit facility.
In Choudhary’s view, “…concerns largely stemmed from CRK’s high debt and potential impact to the company’s cash flows in a stressed gas price environment…” The analyst rates the stock a Neutral (Hold), based on these worries. The $6 price target implies a slight downside, less than 1%, for the stock.
All in all, the analyst consensus view on CRK is a Moderate Buy, based on 3 Buys and 2 Holds. Shares are selling for $6.03, and the average price target is more bullish than Choudhary’s; at $7.50, it implies a 24% upside to CRK this year. (See CRK stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.