Stocks fell to their most profound weekly declines since June last week as a hot Consumer Price Index inflation reading solidified expectations of ultra-aggressive monetary tightening by the Fed. Tuesday’s CPI release showed that critical drivers of inflation aren’t settling down, despite a decline in August’s annual rate to 8.3% from 8.5% the previous month. Excluding food and gas prices, core inflation rose to a higher-than-expected 6.3% from 5.9%. The market fell for the fourth time in five weeks, with the Dow contracting more than 4%, the S&P 500 declining 4.8%, and the Nasdaq falling 5.5%.
Monetary policy will be a focal point next week as global central banks, including the Bank of England, Bank of Japan, and the U.S. Federal Reserve, will come out with fresh interest rate decisions. Markets appear to be pricing in a 75-basis-point rate hike as the most probable outcome for next week’s U.S. Fed policy meeting. We’ll also get updates on the U.S. housing market with August housing starts, building permits scheduled for release, and existing home sales.
Our team has three recommendations of companies to watch in the week ahead. Continue to the complete watchlist to find out who.
Oil and gas prices spiked earlier in the year due to Russia’s invasion of Ukraine and could spike again into 2023 due to the energy crisis in Europe this winter and reserve concerns. Energy stocks have dramatically outperformed the broader market, as evidenced by the 79.9% gain over the past six months for the Energy Select Sector SPDR ETF (XLE).
The International Energy Agency (IEA) expects global energy demand to increase by more than 30% by 2035. APA Corp. (APA) is one of the few oil and gas exploration and production companies offering exposure to the meteoric rise in gas prices.
In the second quarter, APA saw $3.05 billion in total revenue representing 71.3% year-over-year growth with strength across oil, natural gas, and natural gas liquids (NGLs). Adjusted earnings grew 205% from the prior-year quarter to $811 million. Adjusted EPS increased 239% from the prior year period to $2.37. Analysts expect Q3 revenue to be $2.63 billion, indicating a 59.2% year-over-year increase. APA’s earnings are expected to increase 145% year-over-year to $2.40.
MKM Partners analyst Leo Mariani recently raised the firm’s price target on APA from $45 to $50, citing international natural gas prices having reached all-time record levels driven by the cut-off of most Russian gas into Europe as well as outages and maintenance on a few major global LNG facilities around the world.
The 29 analysts offering recommendations mostly agree with Mariani. The stock garners a Buy rating and a $54 median price target, representing a 48% increase from the current price. With a low TTM price-to-earnings ratio of 4.5, APA seems like a bargain against peers.
An expanding global population and rapidly moving urbanization are expected to fuel steel demand for years to come. Vale (VALE), the world’s largest producer of iron ore and nickel and supplier of the steel industry, has been gaining attention on Wall Street, where many believe the stock to be undervalued considering the long-term tailwinds for the industry.
China, the largest consumer of steel worldwide, is spending more on infrastructure, so the demand for iron ore is expected to remain high for the foreseeable future. Vale doesn’t limit itself to iron, though. It produces metallurgical and thermal coal, copper, manganese ore, and nickel, which is used in EV batteries. According to CNBC, the cathodes used in electric vehicle (EV) batteries are a minimum of 60% nickel. As EVs become further adopted into the mainstream, nickel demand will likely soar.
VALE trades at 4.1 times forward earnings, well below the metals and mining industry’s median forward P/E of 9.6 times, indicating that the stock is currently undervalued. Moreover, its net profit margin is around 42% of its revenue. VALE ticks more than a few boxes for a desirable stock. With its share price down more than 6% so far this year, it’s easy to see why now may be an opportune time to strike up a position.
Leading manufacturer of small satellites, Terran Orbital (LLAP) provides end-to-end satellite solutions by combining satellite design, production, launch planning, mission operations, and in-orbit support to meet the needs of the most demanding military, civil, and commercial customers.
Serving the United States and Allied aerospace and defense industries primarily, Terran was recently awarded Mission of the Year by the American Institute of Aeronautics and Astronautics Small Spacecraft Technical Committee for its Cislunar Autonomous Positioning System Technology Operations and Navigation Experiment, otherwise known as CAPSTONE, in cooperation with NASA and Advanced Space. The groundbreaking lunar orbiter is set to complete its mission at an unprecedented low cost in record time.
The company is building spacecraft for other customers and working on its own system of 96 Earth imagery satellites, which co-founder and CEO Marc Bell Bell described as “Earth observation 3.0.” The satellites combine two types of imagery collection technology, optical and synthetic aperture radar, Bell said so that Terran can “overlay the data” and provide more in-depth analysis to customers.
Terran reported record-breaking Q2 revenue results, and management expects to build on that solid momentum in the back half of the year. The company generated revenue of $21.4 million in the second quarter, indicating a 127% year-over-year increase. Net loss was also down at $32.3 million, nearly half of the $71.4 million reported for the previous quarter.
Terran’s solid prospects and existing orders make for reliable indicators of where the company is headed. As of June 30th, the company had built its pipeline to more than 140 opportunities, representing over $16 billion in value. Its backlog is up 200% over the past six months to a record $224.1 million.
Of the six analysts offering recommendations for LLAP, all six rate the stock a Buy. A median price target of $10 represents an increase of 127% from its current price. Stifel analyst Erik Rasmussen recently initiated coverage of LLAP with a Buy rating and an $8 price target. He views the company’s leadership in the design and manufacture of smallsats and its technical capabilities as crucial differentiators. He believes Terran is on the cusp of a tremendous and growing opportunity in the small satellite market.
