When someone who isn't all that fond of the market comes up with five names in the S&P 500 that he actually likes, you have to sit up and take notice. What drives these charts? What makes them buck the bearish trend? Is it detectable from homework? Or is it some mystery, a potential take-out, some self-help, maybe a change at the top or a change in the macro? Or some, of all of them?
That's why when Bruce Kamich, the crackerjack Real Money technician, produced a list of five stocks with good charts, Flowserve (FLS), FMC (FMC), Franklin Resources (BEN), Helmerich & Payne (HP) and NRG Energy (NRG) I had to investigate.
I can justify a buy of every single one of these. Every one. In fact, they are compelling enough to think that they can go every higher without much resistance if just a few things go right.
Let's start with Flowserve, which is a maker of pumps, valves, mostly for the oil, gas, refining and chemicals business. On the surface, this pedestrian industrial seems like a total loser, because it guiding for pretty much down everything.
However, when you dig deeper you get another view: things are stabilizing, not getting worse, while the company is closing or selling or downsizing 13 plants and reducing its global workforce by 15-20%. At the same time, cash flow from operations is improving and March bookings, the end of the quarter, were getting better and better.
There's been a ton of deferral of maintenance that can't be continued and the destocking of valve inventory has ended -- a headwind become a tailwind.
Sometimes, you can tell when a story's bottomed by the questioners on the call. That's why I felt that this one, by Nathan Jones from Stifel, rang true: "This is about as bullish as I've heard you in a couple of years."
So true. It's a buy.
Kamich anointed FMC, and when I read about this one it stunned me how compelling it is. That's because FMC is a company transformed; it's gotten out of its prosaic chemical business, alkali, and moved up the food chain to become the eighth largest crop protection company. The alkali sales pretty much paid for the Cheminova purchase that made FMC a new power in the ag business.
Plus, it gets better. FMC had always been the big player in the making of lithium, which is just now coming into its own with the advent of the electric car. In fact, FMC makes the lithium for Panasonic, which makes the car batteries for Tesla (TSLA). It also has a health and wellness ingredient business, which has 11 consecutive years of record earnings and just became a big player in Omega 3 vitamin production. And it's only a $6 billion company!
Now, given the incredible land grab in ag -- DuPont (DD) teaming with Action Alerts PLUS charity portfolio holding Dow (DOW), Bayer trying to buy Monsanto (MON) and Syngenta (SYT) merging with ChemChina -- the eighth company in this dynamic might be worth owning or speculating on.
I don't know if antitrust would allow it, but I could see the new ag company that's going to be spun out of Dow -- DuPont merging with FMC in a heartbeat. DuPont has a sizable health and wellness unit that would also fit with this company's division, and the lithium business would be a homerun for the processed materials portion of the Dow-DuPont entity.
Franklin Resources is an odd duck. The money manager's been losing assets under management like mad. So why has the chart turned up? Because the business has. It's another one of those situations where intra-quarter business turned up. These kinds of moves based on a quarter getting better and better as it goes along -- or vice versa -- have defined this earnings period. Those like BEN that saw performance increase while the quarter went on and in this case by 500 to 800 basis points vs. the S&P for some of its funds, saw their stocks benefit while a company like Home Depot (HD), which saw deterioration, got slammed.
BEN's improvement has to do with its emerging markets portfolios. After being in the doghouse for ages, these caught fire and that got the stock moving. I found myself thinking that this company, with about half its market capitalization in cash and a monster buyback, could be the type of financial that someone who believes in the emerging markets can get behind. I would prefer the stock of MSCI, but that's a much more muted tracker of the fortunes of these markets that have hurt so many over so many years.
Helmerich & Payne's a tough one. This is a larger land-based drilling company that has seen its business crushed by the decline in oil and gas. It has 347 rigs and 263 are idle. Day rates are dropping still. But somehow, because of cost takeouts, it beat the estimates.
I think oil can trade to $50, but not much beyond that. At $50, the company's fortunes will not be aligned positively. Sure, it's got a good dividend at 4.68% and a pretty clean balance sheet. But I would much rather own Schlumberger (SLB).
So why does it have such a good-looking chart? I think because it's being considered as a logical follow through for Halliburton (HAL) after its huge deal with Baker Hughes (BHI) was nixed by the antitrust division of the Justice Department. I don't like to recommend a stock on a takeover basis if the fundamentals are on the decline, and I think it is safe to say that the fundamentals here are declining unless oil goes back to the $60 or $70s, where the company had previously said it could prosper. I have to pass on this one, because I am just not as bullish on oil as you need to be to pull the trigger on HP.
Finally, there's NRG, and this one's really complicated. First, it had been a traditional energy utility, with one of the largest and most diverse power generation assets in the country. But David Crane, an old law school classmate of mine, tried to reinvent it as a solar, wind and alternative energy company, even as it has a gigantic base of natural gas, coal and oil and nuclear plants. Crane also created a yieldco, a company that could buy solar assets from NRG and pay out big dividends.
In the myriad times I interviewed Crane, he always positioned the company as a leader in solar, wind and electric car fueling stations. But his efforts didn't resonate with the shareholders. The stock got crushed, falling as low as $9 from $37 less than two years before. That was the price where Crane resigned and it's been on the move ever since, climbing as high as $15.
Crane had levered up the balance sheet with his alternative energy schemes. Now they are being dismantled and assets being sold and the balance sheet being fixed by current management. It's become a plain oil utility again, with a decent fleet of assets. The company's got a pathetic $0.03 cash dividend -- Crane had positioned it as a growth utility -- so there's no point in owning it for that. However, it's easy to imagine that the dividend could be in shape to be increased, as management undoes the world of Crane.
I think it can work its way higher as it does.
So, there it is: Flowserve, FMC, Franklin Resources and NRG all do seem like buys to me. As for Helmerich & Payne, I can't pull the trigger. While it has always been a terrific company, it is, in the end, and oil drilling enterprise and that's a non-starter in a world where lower oil prices could be with us for some time.