SunTrust High-Conviction Energy Picks for Q4 Have Massive Upside Potential

Print Email

This year, for the first time in many years, active managers are outperforming index funds, and that should be a loud wake-up call to passive investors. After a more than 10-year bull market, the bull is tired. Although central banks are still providing a liquidity security blanket, and interest rates remain at generational lows, this looks to many on Wall Street like the proverbial “stock pickers” market.

So, many portfolio managers and investors are looking for stocks that can outperform into year’s end and generate a little finish-line alpha. The analysts at SunTrust Robinson Humphrey put together a list of 33 stocks ideas that they feel will outperform into year-end 2019.

The SunTrust team noted this when discussing the high-conviction equity ideas:

Many of our institutional clients are looking for help as they screen for stocks that are poised to outperform into year end, with characteristics or catalysts that will likely become apparent to the market in the fourth quarter. Furthermore, with the recent increased volatility, partly driven by the “great rotation” – out of momentum/growth into value/ laggard names – we are receiving more requests from money managers for value ideas which have lagged, hence the timeliness of this effort.

Today we look at the energy stocks that the analysts are focused on. Four in the report make good sense for accounts with a degree of risk tolerance, and they are rated Buy at SunTrust.

CenterPoint Energy

This is a high-conviction fourth-quarter selection, the only utility company to make the cut. CenterPoint Energy Inc. (NYSE: CNP) is a diversified public utility holding company headquartered in Houston. Its utility segment provides electric distribution and transmission as well as natural gas distribution services to over 2.4 million electric and 3.4 million natural gas customers.

Besides its utility business, CenterPoint also consists of a competitive natural gas sales and services segment. Moreover, it currently holds 54% of outstanding shares of Enable Midstream Partners.

The analysts noted this in the report:

We believe that positive data points in coming months should address investor concerns regarding the near term earnings outlook for the company, resulting in the elimination of the current 10%-11% P/E multiple discount (based on our 2020-2021 estimates). Discounted valuation, above average dividend yield, strong rate base (and earnings) growth potential, and resolution in coming months of pending issues that have been overhanging the stock, create an attractive total return proposition for investors.

Investors receive a 3.98% dividend. The SunTrust price target on the shares is $32, and the Wall Street consensus target is $31.93. The stock ended trading on Thursday at $28.90 a share.

Continental Resources

This company has a very large exposure to crude oil, so it is a pure-play for investors seeking that. Continental Resources Inc. (NYSE: CLR) is primarily a producer of onshore U.S. oil and has positioned itself in two growing hydrocarbon discoveries in the country: 1) the Bakken oil play in Montana and North Dakota, and 2) the SCOOP/STACK in Oklahoma, giving the company good growth opportunities for years to come.

Many on Wall Street feel that the company’s investment thesis is virtually unmatched. Investors get core Permian-like acreage at a non-Permian valuation. Of greatest importance, Continental is one of few diversified large-cap stocks that offers investors exposure to low-cost oil outside of the Permian. With current capacity and distribution issues in the Permian, this is another solid reason to own shares.