Stock of the Week
NYSE Symbol: RIG
Industry: Oil Drillers
Price as of 5/23: $51.95
A rally for the record books took a turn for the worse following comments from the Fed Chairman on Wednesday. Concerns regarding the Fed tapering of their quantitative easing program caused the Dow Jones to give up a 150 point gain before closing down 80 points or 1.47% from the morning highs. A correction at this point would be very healthy for the broader market. A key example is the Japanese Nikkei average. The Japanese average has risen over 50% year to date before pulling back 1400 points or 7% and 9.5% intra-day on Thursday. I don't think US investors want to see our Dow Jones pull back 1000 points in one day. Going forward interest rates have nowhere to go but up. Interest rate sensitive sectors will struggle as rates push higher. Many bond funds, in particular government bond funds, will show negative returns. Other interest rate sensitive sectors like utilities and REITs may also come under pressure. Ironically, the safe haven if there is such a thing may just be the cyclical areas of the market. Going forward Industrials, Technology, Materials, and Energy may start to outperform. Cisco is up 12.8% in one week following earnings . This week we'll highlight an ultra-deep water oil driller recommended in Barron's. The stock of the week is Transocean. Transocean has been on a rollercoaster ride due in part to their involvement in the Gulf of Mexico BP oil spill in 2010. Three years later business is finally picking up and with a PE multiple of 9 and a dividend yield of 4.3% with an ex-dividend date next week, Transocean looks like a good stock going forward.
In the first week of May, Transocean reported earnings disappointing earnings. First-quarter net income rose to $321 million, or 88 cents per share, from $10 million, or 3 cents per share, a year ago - when it took a big charge on the value of its fleet. Excluding one-time items, Transocean earned 93 cents per share, compared with the average $1.00 expected by analysts. Revenue in the quarter grew 4 percent to $2.2 billion. Business remains slow, but going forward the number of rigs operating in the Gulf of Mexico are rising once again. According to Baker Hughes, oil rigs climbed 19 percent to an average of 50 during the first quarter from 42 a year earlier. Transocean looks like its' finally ready to put the BP oil spill behind them and grow their business once again.
A flock of billionaires seem to agree. First, billionaire Carl Icahn has amassed a 5.7% stake in the firm to shake up the management team. He succeeded in ousting the Chairman. More recently, billionaire Glenn Dubin, David Tepper, and Leon Cooperman have bought stakes in the oil driller. In Barron's over the weekend Mr. Cooperman made a compelling argument to buy Transocean. Leon Cooperman sees Transocean making over $7 a share in earnings in the near future with a book value improving to over $70 a share. Currently the stock is trading in the low 50s. Based on these numbers, Transocean is trading for half the valuation of the broader market with a dividend yield twice the rate of the S&P 500.
In this income hungry starved environment, it won't take long for investors to rotate into Transocean and other energy related stocks that still trade before market multiples.