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Market Weekly Review: Record Highs Ahead of Trade Talks

The major U.S. stock market averages gained 2% to 3% across the board this week, as the S&P 500 index set a new record high on Thursday.

Rates Likely Headed Lower

The FOMC held firm with interest rates on Wednesday, but traders are saying it’s just a matter of time before the Fed reverses its controversial rate hike from last December. Fed funds futures are now pricing in a 100% chance of a rate cut at the next meeting on July 31, up from just 18% a month ago.

In reaction to the FOMC, Deutsche Bank strategists said:

“Now that the Fed has all but confirmed that it will cut rates in July, the focus will turn to the depth of the easing cycle. We have addressed this issue last week and concluded that relative to recent history, initial domestic conditions were consistent with a shallow cycle. On the other hand, the nature of the current shock (trade war) is different from the usual domestically driven recession. This makes geopolitical risks potentially more relevant than the Fed for growth and inflation. As such, the evolution of the geopolitical risk will be critical in determining the depth of the easing cycle. More immediately, one could assume that the Fed is comfortable with insurance cuts of 50-75bp and ready to embark in a more aggressive easing cycle if the geopolitical tensions lead to a more significant economic downturn.”

Looking Overseas

While none of the world’s major central banks cut interest rates this week, statements out of England, the EU, and Japan echoed the dovish statement that Chairman Powell and the FOMC issued on Wednesday.

Beyond interest rates, President Trump said on Tuesday that he will have an extended meeting with China’s President Xi, ahead of the G20 summit at the end of the month.

Any deal on that front would likely be welcome news to folks on both sides of the Pacific Ocean. Just Friday, reports were circulating that the U.S. had barred some Chinese computing firms from buying components.

It’s worth noting that other areas of the market are edging up, outside of stocks. Crude oil gained 9% this week, as tensions mounted with Iran, and the price of gold also touched a five-year high.

Knowing what and when to buy can be challenging for any investor. However, the fact remains that attractive investments are out there, if you’re willing to dig a little deeper.

One such energy name that’s worth a closer look is our Stock of the Week below…

Stock of the Week: Continental Resources (CLR)

Continental Resources is an oil (60% of business) and natural gas (40% of business) exploration firm with sizable assets in the Bakken field of North Dakota and Montana, which account for more than 40% of its total 1.9 million net reservoir acres.

We recently added Continental Resources to our Smart Investor portfolio and are pleased to see that shares were up 11% this week.

Looking ahead, these gains should keep on coming. Here’s why:

Returning Excess Cash

Earlier this month, the company initiated a quarterly dividend of $0.05 a share (0.5% yield). The first payout will be made in November. In addition, the Board of Directors pledged to repurchase $1 billion (24.5 million shares) worth of stock through 2020.

You’re not going to be able to retire off the “starter dividend” that Continental is paying, but it’s a clear sign that management is upbeat about the future.

Another positive sign: Chief Executive Officer and Chairman Harold Hamm is the largest holder of Continental, controlling about 76% of the shares outstanding. Back on June 10, it was reported that Hamm upped the ante and bought another $1.5 million worth of the company on the open market.

Wall Street analysts also agree that the stock has value. The average price target by active analysts is $58.50 a share, or 43% above current levels.

One of those analysts is Morgan Stanley’s Drew Venker, who recently stated:

“The key message is that the buyback takes priority over production growth because the stock is too cheap to ignore. We agree. CLR trades at a 10% discount to the oil weighted peers on 2020e EV/EBITDA, which is unjustified given its outstanding cost structure and sustainable cash returns, in our view. After the pullback, CLR trades at a compelling 4.6x 2020e EBITDA on strip ($53 WTI).”

One big competitive advantage the company has relative to its peers is low production costs. Continental claims that it can post break even cash flow, even if crude oil dips below $40 a barrel. This leverage allows management to generate $325 million of incremental annual cash flow for every future $5 increase in the price per barrel of oil.

Management is looking to monetize this and is projecting consistent production growth over the next five years. In the meantime, the company’s balance sheet has been improving. Net debt is expected to fall to $5 billion this year, from $7.1 billion at the end of 2015.

FYI: This is just 1 of the 20+ stocks selected for the Smart Investor portfolio. That’s where we share more detailed insights on our weekly stock picks. You may also want to learn more about how we use TipRanks indicators to find stocks that are primed to outperform. Discover the Smart Investor portfolio here >>

Wishing you a world of investment success!