Covering the equity scene at RBC Capital, US chief equity strategist Lori Calvasina pointed to the upcoming US midterm elections as a major positive catalyst for equities heading into the end of the year. This may sound counterintuitive – US politics is anything but positive these days – but Calvasina makes a strong case for a market rally in the fourth quarter.
“The midterms are a potential positive catalyst later this year. Not only do stocks tend to rise in the 4th quarter of midterm elections, but Congress is expected to return to Republican control, which is good news for stocks as the S&P 500 it’s trending up. Its strongest returns in years that have a Democratic President and divided or Republican control of Congress,” Calvasina explained.
Against this backdrop, Calvasina’s colleagues among RBC’s equity analysts have picked two stocks they see as strong gainers in the coming months – gains of 70% or better. We searched these stocks, using the TipRanks platform, to find out what makes them stand out.
Liberty Energy (LBRT)
RBC’s first pick is Liberty Energy, an oilfield services company in the North American hydrocarbon sector. Oilfield services are the support services required by production companies to extract oil and gas resources from the ground. The producers find the oil and drill the wells. service companies like Liberty provide the necessary support: engineering expertise in the water, sand, chemicals, piping and pumping needed for efficient fracking operations.
Liberty operates in some of the richest energy producing regions of the US and Canada, including the Appalachian gas formations of Ohio, West Virginia and Pennsylvania, and the oil and gas fields of the Gulf Coast, Great Plains and of the Rocky Mountains. In total, Liberty has a presence in 12 US states and 3 Canadian provinces.
Oil well support is extremely expensive and Liberty had a consistent net loss until the second quarter of this year. In its 2Q22 financial release, Liberty reported diluted EPS of 55 cents. That compares favorably to the 3 cent loss from 1Q22 and even better with the 29 cent loss from 2Q21. The gain came from high revenue. the top line grew 62% year-over-year to reach $943 million, the highest level in two years.
These results, especially EPS, were above expectations. EPS was forecast at 17 cents. the 55 cents quoted was more than three times that. Liberty shares have also outperformed this year. where overall markets are down near bear territory, LBRT has gained 45%.
The company’s outperformance is a key factor for RBC 5-star analyst Keith Mackey, who writes: “Liberty’s 2Q22 results were well above our expectations on high levels of activity and pricing. We believe the case for investing in Liberty is becoming increasingly compelling… In our view, Liberty should trade against most of the pressured pumping companies in the coverage group due to its size, strong balance sheet and broad exposure in major watersheds of North America.”
By “premium,” Mackey means 73% upside potential. The analyst gives LBRT shares a price target of $25 to support an Outperform (i.e. Buy) rating. (To follow Mackey’s history, Click here)
Wall Street appears to be in broad agreement with Mackey, as Liberty shares maintain a strong buy rating from the analyst consensus. There have been 8 recent analyst reviews, including 6 buys and 2 holds. The stock’s average price target of $22.38 suggests ~59% upside potential from the $14.11 trading price. (See Liberty stock forecast on TipRanks)
Callon Petroleum (CPE)
RBC is a Canadian investment bank, and Canada is a leader in the global energy market, so it’s no surprise that the company’s analysts keep a close eye on North American energy companies. Callon Petroleum is one of the industry’s independent operators, based in Houston, Texas and with acquisition, exploration and production activities in the Permian Basin and Eagle Ford shale formations of its home state. The company’s assets include approximately 180,000 net acres spread over both regions.
Callon won’t release its Q2 numbers until tomorrow, but we can get a feel for the company’s performance by looking back at Q1. As we look back, we should keep in mind that last fall, Callon completed the acquisition of Primexx’s leasing interests and oil, gas and infrastructure assets in the Delaware Basin. The transaction, which took place in both stock and cash, was valued at $788 million. At the same time, Callon divested non-nuclear acreage in the Eagle Ford play, for a total of $100 million.
With that in the background, we note that Callon reported total hydrocarbon revenue of $664.8 million in Q1, more than double the prior year’s top line. This supported flat adjusted EPS of $3.43 per diluted share – again, this was more than double the result from 1Q21. Callon’s results, both on the top and bottom lines, show solid growth from the second quarter of 2020, reflecting both the return to operations as the pandemic closures ease and the increase in the price of oil and natural gas in the open markets .
In an important point for investors to note, Callon does carry a heavy debt load, including $712 million, nearly half of the $1.6 billion limit on the company’s senior secured credit facility. The company generated free cash flow in the first quarter of $183.3 million and is openly working to deleverage its balance sheet.
According to Scott Hanold, another RBC 5-star analyst, CPE has significantly underperformed its peers over the past year, and that opens up an opportunity for investors.
“CPE shares have significantly underperformed over the past year relative to investor scale/shareholder returns preferences and also following the Primexx acquisition. Performance since the acquisition has exceeded our expectations and deleveraging continues to occur faster than expected. We believe this positions CPE as one of the most attractive SMid caps in our coverage,” explained Hanold.
Consistent with his bullish stance, Hanold rates CPE as Outperform (ie, Buy) and the $75 price target implies scope for ~70% upside potential over the next 12 months. (To follow Hanold’s history, Click here)
Overall, while RBC is trending to the upside, the Street looks more cautious. There are 8 recent analyst reviews on Callon, which break down into 3 Buys, 4 Holds and 1 Sell – for a Hold rating from the analyst consensus. Average upside remains high, however, as shares are selling for $44.18 and their $76.25 average target suggests ~73% upside potential. (See Callon stock prediction on TipRanks)
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Denial of responsibility: The views 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.