Investing

Energy and Financials May Have Biggest Potential Upside: 5 Top Buys for 2021

Those who have ridden the technology tiger this year have made a ton of money, and there is every reason to believe that going forward the sector will continue to be a leader. Yet, as we saw with the massive splits for Tesla and Apple, investors took many of the extra shares and sold stock. Why? They had huge profits and the chance to reset, or even move to the sidelines with a wad of cash.

So where is the potential upside for 2021? It makes sense to view the balance of this year with a somewhat jaundiced eye, as almost regardless who wins the presidential election, there will be a tsunami of disappointment, angst and hand-wringing.

In a new BofA Securities research report, the analysts looked at relative valuation for each sector with an eye toward price-to-book figures. The financial and energy sectors come in with big upside potential based on historical average price-to-book ratios. Does that mean they will come raging back next year? No, but in a pricey market with the potential for extreme volatility in and around the election, taking a look at some of the top companies may make sense for long-term growth investors.

We screened the BofA Securities research universe for stocks rated Buy that have solid risk profiles in the financial and energy sectors. These five make sense now for investors starting to look to make some changes away from momentum stocks.

Apache

This has long been considered an industry leader but its stock has been battered. Apache Corp. (NYSE: APA) is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids (NGLs). The company has operations in onshore assets located in the Permian and Midcontinent/Gulf Coast onshore regions, and offshore assets situated in the Gulf of Mexico region. It also holds onshore assets in Egypt’s Western desert and offshore assets in the North Sea region, including the United Kingdom.

Apache also has an offshore exploration program in Suriname. As of December 31, 2019, it had total estimated proved reserves of 551 million barrels of crude oil, 186 million barrels of NGLs, and 1.6 trillion cubic feet of natural gas. The company remains an acquirer/exploiter/explorer, fiscally conservative company that has grown its reserves and production consistently via acquisitions and organic projects.

Apache posted a solid second quarter, and the analysts said this:

A solid second quarter sees costs and capex trending down and implies a second half of 2020 cash breakeven at $30 a barrel with free cash at the current strip. But overshadowing the quarter was an announced 3rd exploration success at Kwaskwasi further linking Apache’s story to Suriname. Resource scale suggests that story is just getting started but with Suriname still poorly reflected in the company’s share price.

The company pays just a 0.65% dividend. BofA Securities has a huge $26 price target on the shares, well above the Wall Street consensus target of $17.16. Apache stock closed Thursday’s trading at $12.42 a share.

Citigroup

Shares of this top bank have traded at some of the lowest levels since 2016. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.

Trading at a still very cheap 7.2 times estimated 2020 earnings, this company looks very reasonable in what remains a volatile stock market and in a sector that has dramatically lagged.

Note that there is the potential for a consent order to be placed against the bank as federal regulators potentially weigh taking actions against Citigroup over deficiencies in the bank’s risk and control functions. That has weighed heavily on shares, perhaps offering even more opportunity.

The analyst noted this about the current situation:

[A] Wall Street Journal article, if accurate, would certainly reduce the luster of Jane Fraser’s recent appointment to CEO, as this could imply more “clean up” tasks on her plate vs. “growth” tasks. At 67% of tangible book value and the likelihood of staying profitable (i.e., not eroding book value), Citigroup’s shares appear to be pricing in a lot of bad news. However, we continue to think that at current levels, there remains more upside than downside, given the potential to improve returns to 10-12% medium-term, and to close the gap to peers in the mid-teens long-term as Ms. Fraser and new leadership tap the company’s growth potential.

The dividend yield is 4.48%. The BofA Securities price target is $74, and the consensus target is $69.02. Citigroup stock closed at $45.53 on Thursday.