As we discussed in detail last week, our sense is that investor focus is starting to shift toward the election and the growing potential for a Democratic clean sweep in November. Thus far, it appears that investors view Joe Biden as a moderate that will likely raise taxes, but also create more stability around issues such as trade and the COVID-19 pandemic. In fact, we believe that rising expectations for a ‘Blue Wave’ are helping to fuel bubbles in NASDAQ and ‘Green’ stock plays.
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Alex Kania, Blake Gendron, Josh Silverstein, Sam Margolin have an open mic format to discuss daily sector, stock, and commodity thoughts, what we’re hearing from management, answer any questions, or just allow you to vent.
For the week, our E&P Index was -2.9% vs. the S&P500 +1.8% and WTI -0.3%. The volleying in sector performance continues with oil unable to break direction at $40/bbl, challenging outlooks ahead for the E&Ps, valuations still above strip pricing, and election risks looming. It’s the last point that is now in greater focus as the Presidential election is just months away and within, we outline some baskets around the outcomes and provide our thoughts on how the outcomes will impact the sector over the coming years.
451 Research surveyed 540 IT decision-makers regarding their digital transformation efforts. Organizations are embracing cloud-native approaches with almost half of respondents executing a digital transformation, which two-thirds believe is proving successful. The one-third that are laggards have prioritized specialized business processing functions on-premise whereas transformation leaders have focused on BI, data, and analytics as well as public cloud. About three-quarters indicate the project has been successful with 20% saying it’s too early to tell.
We are 15% ahead of stale street, although upside is widely anticipated making for challenging set-ups – this is clearly no “see-through” quarter. On the long side, we highlight attractive set-ups for SWK, GWW, OTIS, RBC, DOV and HON. See pages 6-8 for more details on our EPS and YE20 Target Price revisions.
Quick video brief digging a layer deeper into the most recent Baker Hughes int’l rig count estimates, in the context of what we believe could become the key debate moving beyond 2H20 NAM uncertainty (shape of the int’l recovery, that is). SLB was perhaps a bit more proactive in tempering expectations given the worse-than-expected slide in int’l activity, but we think that favorable HAL regional mix could come into play in terms of N-T earnings execution (for whatever that is worth). HAL continues to communicate int’l revenue down 10% Y/Y, likely a much more modest falloff than what the SLB outlook captures.
In 1984 Ronnie James Dio wrote a song about energy investing called “The Last in Line.” OK, the song is actually about mythical heroes doing something important and dangerous but who are nonetheless outcasts. IOC performance has been weak and the sector feels like “the last in line” because oil demand might take several years to recover to 2019 levels, so the next oil cycle is likely to be late within the broader economic cycle. However, we reiterate our view that IOCs offer value even in the absence of robust oil prices, with dividends supporting intermediate valuation. This note covers 2H20 and 2021 themes with respect to crude oil balances, IOC capital discipline (starvation), and dividend sustainability even with ongoing renewables investments.
Our WR Transport Index rose 2.2% last week, slightly outperforming the 1.8% rise in the S&P 500 and materially outperforming the 1.4% drop in the XLI. The LTLs (+7%), TLs (+4%) and Forwarders (+3%) each nicely outperformed last week, while the Rails (-1%) continued to lag with the each of the U.S. rails and KSU down on the week. After last week’s move, our Transport Index has inflected back positive and is now up 1.8% YTD, outperforming the 1.4% drop in the S&P 500 and the 16.5% drop in the XLI. The LTLs (+33%) and TLs (+16%) continue to outperform materially YTD, while the Rails (-5%) are now the worst-performing transport sub-sector YTD.