Forget Momentum – 2014 is About Value
By Dan Dicker - Feb 14, 2014, 2:26 PM CST
It’s been a tough winter, and not just because of the weather. The markets have given us opportunity but it’s been a barbed-wire wrapped one: Big moves down have looked impossible to buy and have sent me running for conservative, dividend paying stocks.
But this latest swing bringing the Dow again above 16,000 looks equally dangerous. Once again it strikes me that the only reasons to buy stocks are as an arbitrage against surprisingly strong bonds – as long as that 10 year yield hovers near 2.5%, you’ve got no choice but to invest in stocks.
I’ve been trying to relate this bond-arbitrage idea to the oil and gas stocks I cover too; there are prices at which I want to own both the beta plays on domestic production of shale oil and the higher paying (and safe) dividend stocks more often represented by mega-cap integrated oil companies. 2014 is not going to be like 2013 – I imagine a yo-yo, range-bound market that will force us to buy value when it comes and not be afraid to sell it when it rallies. Unless there is a change in Fed policy (and with Janet Yellen at the helm this is more than unlikely), I cannot buy any stocks blindly depended upon any production thesis, no matter how strong. Momentum is out for 2014 – I want value.
Luckily, there is still some value to be had in the market today, even with the Dow at relatively lofty levels – but they’re…
It’s been a tough winter, and not just because of the weather. The markets have given us opportunity but it’s been a barbed-wire wrapped one: Big moves down have looked impossible to buy and have sent me running for conservative, dividend paying stocks.
But this latest swing bringing the Dow again above 16,000 looks equally dangerous. Once again it strikes me that the only reasons to buy stocks are as an arbitrage against surprisingly strong bonds – as long as that 10 year yield hovers near 2.5%, you’ve got no choice but to invest in stocks.
I’ve been trying to relate this bond-arbitrage idea to the oil and gas stocks I cover too; there are prices at which I want to own both the beta plays on domestic production of shale oil and the higher paying (and safe) dividend stocks more often represented by mega-cap integrated oil companies. 2014 is not going to be like 2013 – I imagine a yo-yo, range-bound market that will force us to buy value when it comes and not be afraid to sell it when it rallies. Unless there is a change in Fed policy (and with Janet Yellen at the helm this is more than unlikely), I cannot buy any stocks blindly depended upon any production thesis, no matter how strong. Momentum is out for 2014 – I want value.
Luckily, there is still some value to be had in the market today, even with the Dow at relatively lofty levels – but they’re tough to spot. More often than not, you still have a great thesis that is being bought, but not at the right levels. Look at EOG Resources (EOG), for example – a stock I recommended a week or so ago because it was showing superb strength in the face of a stock market “correction”. At $165 a share, I thought EOG a nice play, but if you missed it, I can’t recommend initiating a position here as it again approaches $180. Same goes for Noble (NBL), a super buy at $61 but less so at $67. Pioneer Natural Resources? I’ll wait until it slips some more, a little closer to $165 again and forego it at $180.
But Anadarko, for example, represents a terrific value – right now.
The obvious question for this E+P goliath is how the final settlement with the Tronox liability will work out. This overhang has trounced the stock even after Anadarko received a very favorable settlement from the deepwater horizon case last summer and watched its shares soar above $95. I think the same scenario is going to play itself out here.
Anadarko has clearly whitewashed it’s liability risks in it’s latest quarterly report, showing only a write-down of $850m, while the ruling from Judge Gropper in December put liability at as much as $14B. But I believe that a settlement will put total costs nowhere near that outer figure and will likely only reach $4-5B. That’s a heavy number but at $82 a share, the market is expecting the worst-case scenario, not this relatively manageable figure.
And Anadarko assets might be the best of all the independent large-cap E+P players out there, with a strong presence in the Niobrara shale play in Colorado, the Eagle Ford in West Texas and the Marcellus shale gas play in Pennsylvania. Add to this the potential future production in the Gulf of Mexico from their Shenandoah field and you’ve got one of the best array of assets around.
2014 is going to be a tough trading year. Finding value will be the name of the game, especially when the indexes dip. But Anadarko represents one such value now. Recommended at $82.
