Energy or Health Care on the Rise? - My thoughts for the week - 2023/02/12
Deep dive analysis on energy etf and cvs company, to form an investment or trade hypothesis.
Hello and welcome to another issue of 🕵 The Seeker 🕵
"Success is not final, failure is not fatal: it is the courage to continue that counts." - Winston Churchill
Me and my brother had a rough two weeks with colossal amounts of work to do, but we managed trough and now we are back on full power for another issue of the newsletter. Let’s get into it!
In the last article we talked about MPC 0.00%↑, which after the article retraced a bit and got some breath, but its now back on pushing higher mode. I am very bullish on the Energy stocks in particular for the coming year, due to a couple of reasons I would like to outline in today’s article.
Specifically:
Pretty much all of my Quant Tools are Flashing Deep Green about Energy!
For example, momentum is clearly positive and consistent throughout timeframes. (we have more tools which increase in complexity exponentially!)
Energy Stocks profits are predominently driven by oil prices and revenues are highly correlated with oil prices. Oil prices can be heavily affected by geo-polical situation. USA Strategic Petroleum Reserve is at its lowest level since 1984 at 371,579 Thousand Barrels.
Clearly one of the reasons why oil prices have been steady around 75-85$ level is because of the SPR. And now with demand being steady, however, supply getting more scarce, the outlook for oil is very bullish! Which will translate in increased revenue for Energy Stocks across the board.
Analysts from prominent financial and trading institutions were competing who to upgrade Energy stocks first in the last couple of months. (All of those companies are in the XLE!)
Industry 200-day Breadth looks stable and around 80%.
Thoughts on the overall market
The SPX has broken last year's downtrend however, the price retraced backward to 4070 at the end of the week. As well yields were back in a climbing mode which was a signal for caution over the last year. This may be driven by the very good jobs numbers, which suggest more inflation and more inflation would need even higher interest rates to get under control! I think we have to be very careful right now, because this may turn out to be a fakeout! 🧐
SPX
2-Year Yields
In my opinion: We have to wait and see, because the fresh push higher in yields may fuel a new sell-off. And there are some indications of over-enthusiasm in the market, some stocks have already made 100% up from their bottoms, an example is NVDA 0.00%↑ .
What to expect in the coming week
Monday, Feb 13th:
Japan - GDP
FED Speak - Bowman
Tuesday, Feb 14th:
US - CPI ( Very Important - Can cause big price movements)
FED Speak - Barkin, Logan, Harker, Williams
Wednesday, Feb 15th
UK - CPI
US - Retail Sales, Industrial Production
Thursday, Feb 16th
US - PPI, Housing Starts, Initial Jobless Claims
This Week Picks
My first pick is the OIH 0.00%↑ ETF, Oil Equipment Services. This ETF’s components are currently having the most analysts’ ratings increases. And I am looking into a Cup & Handle pattern + price stabilizing at the edge of the cup. But that’s just the price action, we should not forget the Fundamentals in terms of potential oil price increases.
Forecasts
Goldman Sachs GS 1.25%↑ forecasts Brent crude to trade at $105 per barrel by Q4 2023 due to solid global oil demand growth, and OPEC's pricing power is expected to limit downside risks to this bullish forecast.
Demand for natural gas is also on the rise, according to Allied Market Research the global natural gas market is projected to grow at a CAGR of 3.4% to $424.70 trillion by 2031.
But let’s have a look at the monthly wti crude price graph. It looks like it has stabilized last 3 months on the 20-month moving average… potential move higher looks highly likely…
If my hypothesis is somewhat true, the oil price would soon start climbing slowly upwards, however this still depends on the willingness of US to lower even more the SPR.
Another Pick
I am looking into CVS 0.00%↑ this week also, It just reported a positive earnings surprise and as well technically it looks like it has just formed some sort of a triple bottom figure.
CVS Health Corporation provides health services in the United States. It serves employer groups, individuals, college students, part-time and hourly workers, health plans, health care providers, governmental units, government-sponsored plans, labor groups, and expatriates. Its Pharmacy Services segment offers benefit management solutions, including plan design and administration, formulary management, retail pharmacy network management, mail order pharmacy, specialty pharmacy and infusion, clinical, and disease and medical spend management services.
Fundamentals
CVS has reported strong last 4 quarters and have a consistent revenue growth last 3 years.
Furthermore, the Net Profit Margin is above the industry average and firmly around 2.9% which is healthy for the consumer staples industry. An industry which relies and huge revenue and small profit margins.
EPS growth is the highest within the industry for the last quarter, suggesting increased effectiveness in the cost structure.
Furthermore, substantial Asset Growth compared to the Debt Growth. CVS 0.00%↑ balance sheet looks pretty healthy.
Fair Value Model
Our 3 fair value models as well suggest a price at least 7% higher than the current level.
Final thoughts
The oil and gas sector is projected to rise in the coming year driven by SPR, China's reopening and much less reliance on Russia as an oil exporter. Furthermore, if yields induce another market volatility spike and a leg down, I would expect Health Care sector and Energy sector to be rather more stable than the overall market.
Well, that’s all from me for this one. As always, I would love to hear your thoughts in the comment section below.
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😎 Cheers! 😎
Disclaimer: Please note that the information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. The information provided should not be relied upon as a substitute for financial, legal, or professional advice. Before making any decision, it is important to consider all relevant information and consult with a professional who can provide personalized advice based on your specific circumstances. The author and publisher of this article cannot be held liable for any actions taken based on the information provided. This is not a recommendation to buy or sell any specific securities or financial instruments.