One of the very best ways to judge the health of a public company is by the way the bonds trade. The bond market, and bond investors, often can help predict the way that a company’s stock will trade. An outstanding new research report from SunTrust Robinson Humphrey tracks the performance, or in most cases outperformance, of the debt of some top exploration and production (E&P) companies.
The SunTrust team found six companies in which the debt is outperforming strongly both year to date and in the past 30 days. The research report notes that an analysis of past five full cycles showed that top 50% of E&P companies that performed best in equity up-cycles had bonds that had best returns in down cycles. The bottom line for investors? The bonds outperforming now could signal strong equity performance in the next up-cycle.
We picked four of the companies rated Buy that have had tremendous bond outperformance that also have almost 100% or more upside to the SunTrust current price targets. These are stocks that are suitable for very aggressive accounts that have a patient long-term outlook.
The stock has been cut almost in half from highs printed last summer. CONSOL Energy Inc. (NYSE: CNX) is one of the largest independent natural gas exploration, development and production companies, with operations centered in the major shale formations of the Appalachian basin. It deploys an organic growth strategy focused on rapidly developing its resource base. As of December 31, 2014, CONSOL Energy had 6.8 trillion cubic feet of proved natural gas reserves. Its premium coal assets are sold to electricity generators and steelmakers, both domestically and internationally.
Top Wall Street analysts point out that company management noted that operations in the Marcellus continue to become more efficient as CONSOL drills longer laterals, more stages and uses more proppant. The efficiency may be helping to drive earnings, which have seen a nice streak of beating estimates, over the past half year. The company’s debt has seen 45% outperformance year to date and 7% over the past 30 days.
CONSOL investors receive a 0.5% dividend. The SunTrust price target for the stock is $15. The Thomson/First Call consensus price target is higher at $16.38. Shares closed Monday at $7.88.