I want to begin the trading week with a big shout out to Jim "El Capitan" Cramer for his recent three-part series, 10 Lucrative Themes for 2013. It's an expansive and well-thought-out tapestry with many insights to help investors position their portfolios for the new year.
I would like to expand on Jim's fifth theme: that expanding domestic energy production has been, and will continue to be, a game-changer. This development over the last few years has put U.S. refiners in a sweet spot due to expanded and lower-cost crude oil input to refinery processes, and it has provided wide crack spreads. It has also given petrochemical producers such as Dow Chemical (DOW), which has leveraged exposure to low-cost natural gas in the U.S., the upper hand against global competition.
These trends will likely remain in play for 2013 and beyond, which is good for engineering and construction companies poised to assist domestic refiners to expand production capacity and build multi-billion dollar chemical plants in the U.S. over the next decade. Two of these beneficiaries have seen their stocks perform well in the last half of 2012, and I would look for this outstanding performance to continue as they profit from the expansion of domestic oil and gas production, and by the forces unleashed by this secular trend. They should also benefit as fracking technology eventually unleashes these same forces overseas.
First is Foster Wheeler (FWLT), an engineering and construction contractor as well as a supplier of power-generating equipment worldwide. I have owned the shares since July, when they were trading around $18, and they have performed well since; 2013 should be another solid year for Foster Wheeler investors.
Four reasons FWLT still has valued at just under $25 a share:
- The company just won a $500 million contract in Kuwait, more than tripling the capacity of a refinery complex there. The company gets most of its sales outside of the U.S. (the majority from faster-growing Asia and South American regions). The company should benefit from refinery expansions necessary to process increasing domestic oil production.
- After falling in 2012, revenue should post growth in the low-double digits in 2013. The stock sports a five-year projected price-earnings-growth ration below 1 (0.70).
- Foster Wheeler has a solid balance sheet, with more than $550 million in net cash on the books -- approximately 20% of the stock's market capitalization.
- Taking out cash, FWLT is priced at less than 10x forward earnings. Even after its recent run-up, the stock is still selling in the bottom third of its five-year valuation range based on price-to-book, price-to-earnings, price-to-cash-flow, and price-to-sales ratios.
Chicago Bridge & Iron Co. (CBI) provides various services to energy and natural-resource industries worldwide. It is exposed to building energy infrastructure facilities, such as natural gas liquefaction and regasification terminals, gas processing plants, refinery units and petrochemical complexes.
Four reasons CBI still has upside from $49 a share:
- Earnings are moving up nicely. The company made just over $2.50 a share in 2011 and is on track to make $3 a share in 2012. Consensus estimates are for $3.50 a share in 2013.
- The company posted revenue growth near 20% in 2012; analysts project similar growth in 2013. The stock sports a five-year projected PEG below 1 (0.87).
- Chicago Bridge & Iron has a solid balance sheet with about $750 million in net cash, more than 15% of its market capitalization.
- Subtracting cash, CBI is selling at less than 12x forward earnings.