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BARC Barclays Plc

183.20
1.68 (0.93%)
28 Mar 2024 - Closed
Delayed by 15 minutes
Share Name Share Symbol Market Type Share ISIN Share Description
Barclays Plc LSE:BARC London Ordinary Share GB0031348658 ORD 25P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  1.68 0.93% 183.20 183.48 183.52 185.68 182.82 183.32 54,857,915 16:35:20
Industry Sector Turnover Profit EPS - Basic PE Ratio Market Cap
Commercial Banks, Nec 25.38B 5.26B 0.3470 5.29 27.81B

A Look at Oil Refiners, Ebola Fighters -- Barron's

23/10/2014 1:44pm

Dow Jones News


Barclays (LSE:BARC)
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By John Kimelman

The stock market may be bouncing back after a pulse-quickening few weeks. But the recovery in the price of oil has been far more tepid.

In recent weeks, falling energy prices have punished shares of companies in oil services, exploration and production, and refining.

But according to StreetAuthority's David Sterman, certain refiners appear to be babies in the tossed-out bathwater of weak energy prices.

"Investors are dumping refinery stocks, even though the broader operating backdrop for these firms is actually improving," writes Sterman. "Investors now have a chance to profit -- before the crowd catches on."

As Sterman explains it, to understand profit margin trends for oil refiners, one needs to understand the impact of price differences in the United States -- West Texas Intermediate is the benchmark -- against the rest of the world, which uses the Brent crude benchmark.

Sterman writes that European refineries, which ship gasoline and diesel to U.S. shores, must use the pricier Brent crude. "U.S. refiners, meanwhile, can undercut the importers whenever the gap between West Texas and Brent prices widen.

"That figure has recently widened back to $5. And according to Citigroup, the gap may grow further. They recently boosted their price targets for refiners on our view that crude differentials will widen on the back of growing North American production and a lack of any major change in oil export policy in the near future," Sterman writes.

Investors interested in U.S. refiners, writes Sterman, might want to consider yield-rich Alon USA Partners (ticker: ALDW) or HollyFrontier ( HFC).

Alon, he writes, should be able to generate a $2.64 dividend payment in 2015, according to Citigroup forecasts. "That's a 15% yield, based on current prices. Citigroup's $22 target price adds 25% potential share price appreciation to that income stream."

Sterman also likes HollyFrontier, which has established a track record with shareholders, delivering buybacks, regular dividends and special dividends. "A current $500 million buyback plan is in place now, and investors should look for more special dividends in 2015," he adds.

He refers to a Barclays report on the refinery sector, which concludes: "We believe the U.S. refiners remain significantly undervalued. In our base case scenario, we estimate the group's average potential upside at 53% over the next couple years."

But while refiners look enticing, the same can't be said for biotechs that have gained attention lately for efforts, both real and hyped, to help fight Ebola.

In a piece for The Street on Tuesday, veteran biotech writer Adam Feuerstein thinks that this sector, despite its fall in recent days, is still overpriced and could provide further disappointment as the fundamentals of these stocks outweigh the public fears buoying this sector within the biotech sector.

For example, he writes, shares of iBio ( IBIO) have jumped strongly since early September on speculation that its plant-based antibody manufacturing technology would play a big part in ramping up production of ZMapp, the experimental Ebola drug already used to treat several infected patients before supplies ran out. "The truth is more sobering: iBio is a tangential player in one of several ZMapp manufacturing plans under consideration. The odds of iBio generating meaningful revenue from ZMapp are small relative to the company's almost $200 million market value," he writes.

Finally, anyone who needed a reminder that the term "hedge fund" is one of the greatest misnomers in the English language should read a piece in Tuesday's Wall Street Journal about the big performance dive that many leading funds have taken thus far in October.

Many investors supposedly buy hedge funds because they will behave differently than a regular long-only stock portfolio. That means, when stocks fall, these funds should, if not gain value, at least have more subdued losses.

But while stocks were falling hard in October before this week's recovery, many brand-name hedge funds were falling even harder, according to the Journal.

Many leading hedge funds are simply unregulated long-only portfolios that rarely hedge in an effort to lessen portfolio declines. And the unofficial return numbers leaked to the Journal show that reality quite clearly.

According to the Journal, top firms including Jana Partners, Discovery Capital Management and Paulson & Co. have posted losses ranging from 5% to 11% for the month, according to investors.

In the article, Brad Alford, a manager with Alpha Capital Management, an Atlanta-based investment firm, attributed some of the losses to funds crowding into the same stocks and rushing out at the same time.

According to the Journal, Paulson's Advantage Fund was down nearly 11% for October through a week ago last Tuesday, bringing the $21 billion firm's losses in that fund for the year to nearly 22%, according to data from Lyxor, the wealth-management arm of Société Générale that invests client money in hedge funds.

Comments? E-mail us at editors@barrons.com

 
 
 

Subscribe to WSJ: http://online.wsj.com?mod=djnwires


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