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Research: Lulelemon’s Sweating It Out




COVID-19 Initial Impact Report​

Lululemon Athletica Inc.



Analyst Note
Updated May 25, 2020

COVID-19 Net Benefit Score: -5.25

Financial Stress Test Ratings:

Free Cash Flow: C-

Interest Coverage: A++


LULU is principally a designer, distributor, and retailer of healthy lifestyle inspired athletic apparel and accessories. LULU competes in the athletic apparel industry, an emerging market that has an estimated growth rate of 6.8%. LULU is the most recognizable brand in the athleisure segment. LULU competes on premium brand image and technical product innovation. Its distribution channel includes 460 company-operated stores in 17 countries and direct-to-consumer. Due to the spread of COVID-19, many of the stores are currently closed, having a significant impact on its business. However, there is a shift in consumer purchase preferences towards e-commerce, with 20.4% of total apparel purchases in the USA coming from online sales.

Market Data











Cash &






Basic Shares






Stock Chart


Lulelemon’s Investment Thesis

We are underweight on Lululemon Athletica Inc. (LULU). We think LULU is unlikely to benefit or emerge as a stronger player, from the impact of COVID-19 and the post-Pandemic world order.


While LULU has witnessed substantial growth in its top line in recent years, we do not think this is likely to continue given that discretionary consumer spending will likely decline (because of reduced income and high unemployment) and disruption in supply chain (as the focus will shift away from global supply chain towards local production; this will also squeeze margins, given high cost of production in the US).


The existing investment thesis of LULU also suffers from significant execution risks. LULU’s current investment thesis is based on (1) large untapped international opportunity (especially in Asian markets), (2) ongoing growth in the ecommerce business, and (3) a substantial opportunity to increase its square footage by opening more stores. However, we think all these opportunities have a substantial execution risk especially in a post-pandemic world order.


➤ Key Factors: Our review of key pandemic impact factors shows that LULU will be affected by two negative factors (closed physical stores and disruption in supply chain) and one positive factor (its growing presence in ecommerce business).


➤ Financial Stress Test: In recent years, LULU has witnessed strong growth in both its top line and bottom line. It has strong debt ratios – leverage ratio and interest coverage ratio – given its low debt. However, cashflows are an area of concern.

Lululemon Pandemic Impact Factors Review

NXTanalytic considers 7 factors and 30 specific indications that we believe will impact companies during and after the Covid-19 pandemic. These factors include: Online Business Profiles, Dealing with Consumers In Person, Effect of Increased Health Regulations, Supply Chain Risks, Travel, Changes and Disruption in Tourism, Travel and Hospitality, Increased Demand for Health Care and Health Safety, WFH and SAH.

COVID-19 Factor Analysis




Total Regression




Risk Rate



Benefit Rate


Pandemic Impact Factor Analysis

Our analysis suggest that LULU faces significant risks. Our model gives it a total score of -1.514 (attributable to -5.25 COVID-19 risk rate and 3.736 COVID-19 benefit rate). Risks emanate from both the supply side and the demand side. On the supply side, given the emphasis on social distancing, majority of LULU’s 460 physical stores across the Globe are shut, causing significantly impacting its top line. In addition, increased variability in supply chains and the emphasis on local production (instead of global supply chains) is squeezing margins (given that the cost of production in North America is higher, than in the US) thus impacting LULU’s bottom line.


On the demand side, lower discretionary consumer spending (as a result of lost incomes and high unemployment levels) and the lack of physical activity (because of closed gymnasiums as well as restrictions on outside movement of people) is impacting the demand for LULU’s product line. Encouragingly, LULU has been focusing on increasing its online presence and has launched marketing campaigns specifically designed for indoor activities (Sweatlife Workout Challenge, is an example) which will support LULU’s online sales. However, they are unlikely to completely offset the decline in sales caused by the closure of physical stores.

Relevant Factors

➤ Online Presence: LULU has been trying to augment its presence in ecommerce, which has resulted in a sharp growth in its online sales. In fact, direct to customer sales increased by 35% y/y in 2019. During the pandemic a strong digital presence is undoubtedly beneficial. LULU can leverage its strong brand value to attract existing and new customers looking to purchase athleisure clothing or accessory purchase.


➤ In Person Businesses, Crowds & Groups: Physical stores still account for a bulk of LULU’s revenues; as of September 2019, LULU had 460 stores across the Globe. Given the nature of LULU’s business, where customers prefer to try a product before purchasing. A temporary closure of stores has had a significant impact on its sales.


➤ Supply Chain Risk: LULU depends heavily on international suppliers for its products. In fact LULU’s five major suppliers account for 56% of its products. Its suppliers are mainly located in Vietnam, Cambodia, Sri Lanka and China. We think in a post-Pandemic world order the emphasis would be on local supply chains rather than global production. Given that the cost of production tends to be higher in North America, it would squeeze LULU’s margins. Moreover, the fact that LULU does not have long-term contracts with its existing suppliers, does not help either. As a result, we believe LULU has at a high risk of supply chain disruption.

Pandemic Factor Screening and Scoring

NXTanalytic research is based on the thesis that consumer and business behaviour and practices will be changed significantly as a result of the pandemic and its aftermath. We have developed a group of seven major factors that we believe indicate whether a company has an increased risk or reward profile.


We approach our analysis in the context of three time periods:


1. Near term effect of the pandemic

2. A Resulting Recession/Bear Market

3. Longer Term Psychological Effects: Changes in consumer and business behavior and practices as a result of the pandemic.

Scoring and Rating for Factor Exposure

We objectively score businesses based on positive and negative factors and how significantly they may be affected by each applicable factor. Our model generates a total regression score by generating a coefficient of the risk and reward scores given to the company by an experienced analyst.


We generate a Total Regression Score, a Covid-19 Risk Rate and a Covid-19 Benefit Rate.

➤ Online Businesses: Due to social distancing and lockdowns and Work From Home, businesses that operate online, or produce the tools for companies to adapt to more demand for online services should experience a surge in demand due to the coronavirus, Covid-19 outbreak. Consumers will more rapidly move online across many categories. Trends already in place will accelerate. Companies whose businesses are online or are rapidly moving online are better prepared to serve the market while those based on bricks and mortar are more likely to be challenged. 

➤ Dealing with Consumers In Person: Businesses that deal with large numbers of people in close proximity to each other will be negatively affected long term. Regardless of how long the pandemic will continue, its psychological, economic and financial effects, have inevitably altered the perception of risk from exposure to large group settings. Consumers are going to avoid gathering in large groups – particularly individuals over 60. We believe consumers will be fearful of the virus and we are assuming that even when the rate of infection has slowed through social distancing and other “curve flattening” efforts, the virus will be a threat for more than a year or until widespread vaccination has taken place. Even after vaccination efforts minimize the immediate threat consumer behavior will be changed long term and concern over future pandemics will be heightened for many years.

➤ Increased Health Regulations and Restrictions: Restrictions on travel and trade as a result of the pandemic are likely to remain in place for months or years and public health regulations will become stricter and more widespread. It’s highly probable that enhanced screening, permit and visa requirements, reductions in ease of travel and transport of goods will be impacted or implemented. Governments, in an effort to restore consumer confidence, will enforce new regulations designed to protect consumers from the current pandemic and future pandemics will overshoot and result in impairing businesses who rely on international supply chains, movement of large numbers of people, or are otherwise perceived as presenting a high risk of infection to consumers.

➤ Supply Chain and Cross Border Risks: The fact the virus can remain alive for many days on inanimate objects and surfaces is a good example of a pending supply chain issue. Perishable product supply chains designed to move items from producer to consumer in days could be significantly impacted. Overall we believe that businesses that ship goods internationally or rely on global supply chains are at risk of business interruption as the pandemic circulates globally. Further, companies with long international supply chains in countries with poor healthcare systems will likely be pressured to replace suppliers and build new supply chains closer to home markets in order to avoid new border restrictions and the potential of localized lockdowns put in place to handle future outbreaks.

➤ Travel, Tourism, Hospitality and Entertainment: The most obviously impacted sectors are businesses on the front line of day to day consumer interaction. Restaurants, coffee shops, event venues, bars, pubs, hotels, resorts, etc could experience a prolonged or permanent change in consumer demand or be required to spend significantly on technologies and services designed to mitigate consumer concerns over health risks. Consumers will likely continue to avoid contact with crowds or reduce visits to brick and mortar hospitality and entertainment focused businesses. Companies in these sectors will need to change business practices and deploy technologies and systems designed to protect customers – many of these do not exist yet or are expensive.

➤ Work From Home and Stay At Home: The most obvious winners are companies who enable consumer cocooning or Work From Home (WFH) and Stay at Home (SAH) behaviour. As these social and business trends become entrenched, demand for a range of new solutions for managing a distributed workforce will provide existing platform companies and new entrants with opportunities to grow market share and fill demand. Companies not offering WFH opportunities will suffer, compromising their ability to attract the best employees. The delivery economy, pioneered by the likes of and any company that focuses on in home exercise, consumer electronics, home entertainment and ecommerce are well positioned to profit from a long term trend towards SAH behaviour. The trend towards non-brick and mortar retail, will accelerate.

➤ Health, Medicine & Safety: Companies focused on the health and safety of consumers and crowds will be positioned to assist businesses who will require new and robust health security solutions in order to attract customers. Heightened focus on health and virus risks will likely spur expenditures on antiviral medications and treatments, vaccines, screening systems and devices, rapid testing, containment and quarantine solutions and services, and telemedicine. Demand for antimicrobial or antiviral materials or other “bio tech materials” and products is likely to be strong in a post pandemic world.

Financial Stress Test


Low Quality
High Risk

Free Cash Flow: C-


Low Quality
High Risk

Interest Coverage: A++

Financial Ratios


Feb. 2nd

2020 A



1.68 X



0.27 X



0.23 X



0.38 X



43.90 X




0.52 X




NXTanalytic reviews a series of financial measures designed to provide a snapshot of the company’s financial health and ability to deal with the challenges or opportunities created by the pandemic, the recession and post pandemic economic environment.


Although LULU had a strong financial position in the past, we do not think this trend is likely to continue in the ongoing COVID-19 pandemic and even in the post-Pandemic world order. With the existing supply chain expected to be disrupted and the physical stores likely to witness limited sales (as a result of ongoing social distancing and an expected decline in discreet consumer spending), we expect LULU’s margins to remain under pressure, particularly if the overall macroeconomic environment remains volatile.

Stress Test Highlights

➤ Leverage Ratio: LULU does not have long term debt in this fiscal year. Even though it still has capitalized leases, the leverage ratio remains low. However, this might not be the optimal capital structure.


➤ Interest Coverage Ratio: LULU does not have any interest expense because of absence of any debt. This gives LULU a A++ rating in terms of interest coverage ratio. LULU will be able to pay interests if it decides to take additional debt in the next few years. It also gives LULU flexibility when funding future capital expenditure.


➤ Free Cash Flow: The EV/FCF ratio is high, leading to a C- rating in free cash flow. This indicates that LULU is relatively slow to generate cash flow. Since sales are very likely to go down due to the pandemic, this could be an even more concerning issue in the future.

Financial Stress Test Analysis

NXTanalytic completes a financial analysis of each company using data taken from the most recently audited financial statements. Our goal is to provide a snapshot of a company’s financial condition and ability to survive a prolonged period of reduced growth, and/or finance growth or restructuring to take advantage of new opportunities.

Cash Flows as a Focus of Screening

Debt Servicing

➤ Interest Coverage Ratio = EBIT / Interest Expense: A powerful measurement of the ‘survivability’ of a corporation. It reflects the ability of a company to pay interest on the outstanding debt and is thus an important assessment of short-term solvency. If the ratio is underneath 1.0 X, this means that the company cannot currently cover interest charges on its debt from current operational income. This could mean that the company is funding itself through the sale of assets or further financing; which are unsustainable. The higher the ratio, the higher probability to survive in the future financial hardship.

Free Cash Flow Valuation

➤ Interest Coverage Ratio = EBIT / Interest Expense: A powerful measurement of the ‘survivability’ of a corporation. It reflects the ability of a company to pay interest on its outstanding debt and is thus an important assessment of short-term solvency. If the ratio is underneath 1.0 X, it indicates the company cannot currently cover interest charges on its debt from operational income. This could mean that the company is funding itself through the sale of assets or further financing; which are unsustainable measures. The higher the ratio, the higher the company’s ability to survive financial hardship.

➤ EV/FCF Ratio = Enterprise Value / Free Cash Flow: Based on our debt servicing thesis we primarily value companies based on their cash flows. We rely on the EV/FCF ratio to assess the total valuation of the company in relation to its ability to generate cash flows. Enterprise Value is the value of the entire company, both its debt and traded equity. When this is divided by its Free Cash Flow we see how much we are paying to buy that cash flow. The lower the ratio the cheaper it is to “buy” the cash flows of the company.

Leverage Ratios

Debt ratios are classic balance sheet health measuring tools used to indicate potential risks to future financing ability (ie. violating debt covenants) or as a barometer of the defensive position of the company if cash flows are ever an issue. They are long-term solvency metrics and reflect the degree to which the company is financing its operation through debt versus equity. If a company has poor leverage ratios (too much debt), it might need to aggressively finance its growth through debt and as a result require more and more cash flow from operations to adequately service its debt. Our view is that companies with less debt are more likely to be able to withstand challenges or fund opportunities created by the pandemic.

➤ Financial Leverage Ratio = Total Debt / Total Equity: The Financial Leverage Ratio is a measure of the degree to which a company is financing its operations through debt. More specifically, it reflects the ability of shareholder equity to cover all outstanding debts in the event of a business downturn.

➤ Debt-to-Capital Ratio = Total Debt / (Total Debt + Total Shareholder’s Equity): The Debt-to-Capital ratio measures the amount of financial leverage in a company. This tells us whether a company is prone to using debt financing or equity financing. A company with a high Debt-to-Capital ratio, compared to a general or industry average, may be impared due to the cost of servicing debt and therefore increasing its default risk.

➤ Debt-to-Equity Ratio = Total Debt / Total Shareholder’s Equity: A high Debt-to-Equity ratio generally indicates that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of additional interest expense. If the company’s interest expense grows too high, it may increase the company’s chances of a default or bankruptcy.

➤ Debt-to-Assets Ratio = Total Debt / Total Assets: The Debt-to-Assets ratio shows the degree to which a company has used debt to finance its assets. This ratio can be used to evaluate whether a company has enough assets to meet its debt obligations. A ratio greater than 1 indicates that the entire company’s assets are worth less than its debt.


Does the Analyst or any member of the Analyst’s household have a financial interest in the securities of the subject issuer?


Does the Analyst or household member serve as a Director or Officer or Advisory Board Member of the issuer?


Does NXTanalytic or the Analyst have any actual material conflicts of interest with the issuer?


Does NXTanalytic and/or one or more entities affiliated with NXTanalytic beneficially own common shares (or any other class of common equity securities) of this issuer which constitutes more than 1% of the presently issued and outstanding shares of the issuer?


Has the Analyst had an onsite visit with the Issuer within the last 12 months?


Has the Analyst been compensated for travel expenses incurred as a result of an onsite visit with the Issuer within the last 12 months?


Has the Analyst received any compensation from the subject company in the past 12 months?



This research report was prepared by NXTanalytic Inc., which is not a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. NXTANALYTIC IS NOT SUBJECT TO U.K. RULES WITH REGARD TO THE PREPARATION OF RESEARCH REPORTS AND THE INDEPENDENCE OF ANALYSTS. The contents hereof are intended solely for the use of, and may only be issued or passed onto persons with which NXTanalytic has given consent. This report does not constitute advice, an offer to sell or the solicitation of an offer to buy any of the securities discussed herein.


This research report was prepared by NXTanalytic, which is not a registrant nor is it a member of the Investment Industry Regulatory Organization of Canada. This report does not constitute advice, an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. NXTanalytic is not a registered broker-dealer in the United States or any country. The firm that prepared this report may not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts.


All information used in the publication of this report has been compiled from publicly available sources that NXTanalytic believes to be reliable. The opinions, estimates, and projections contained in this report are those of NXTanalytic Inc. (“NXT”) as of the date hereof and are subject to change without notice. NXT makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and that contain information and opinions that are accurate and complete; however, NXT makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to NXT that is not herein. This report is provided, for informational purposes only and does not constitute advice, an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction. Its research is not an offer to sell or solicitation to buy any securities at any time now, or in the future. Neither NXT nor any person employed by NXTanalytic accepts any liability whatsoever for any direct or indirect loss resulting from any use of its research or information it contains. This report may not be reproduced, distributed, or published without any the written expressed permission of NXTanalytic Inc. and/or its principals.


©2020, NXTanalytic. All rights reserved.

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Bitcoin was the third-worst performer last year as low cap altcoins showed the biggest returns

Looking at the top 20 cryptocurrencies by market cap (excluding stablecoins), altcoins showed the biggest returns leaving Bitcoin in the dust.
The post Bitcoin was the third-worst performer last year as low cap altcoins showed the biggest returns appeare



Looking at the top 20 cryptocurrencies by market cap (excluding stablecoins), altcoins showed the biggest returns leaving Bitcoin in the dust.

According to Kraken Intelligence’s Crypto-in-Review report, the crypto market had a huge disparity in returns last year, with Shiba Inu (SHIB) amassing a return of 41,800,000%, while Bitcoin (BTC) recorded a return of just 58%.

And while these numbers might seem high when compared to traditional financial assets like the S&P 500 index, it’s important to note that Bitcoin was the third-worst performer of the 20 largest cryptocurrencies—well below the median return of 646%.

Bitcoin fails to leave a mark in last year’s performance metrics

Last year has been monumental for the crypto market. After a painfully volatile 2020 scarred by the global pandemic, 2021 started with tangible positivity in the air. It reinstated the macro bull trend in the market, bringing much-needed upward price action that revitalized the industry.

In its 2021 Crypto-in-Review report, Kraken Intelligence found that, as a whole, the market finished 2021 up 187%. And while this pales in comparison to 2020’s 310% return, it’s still miles ahead of 2019’s 58% return.

As a beacon of the broader crypto market, Bitcoin’s performance is always taken as an indicator of the de facto state of the market. Just like every year in the past 4-year market cycle, Bitcoin outperformed most traditional financial assets such as the S&P 500, the NASDAQ, gold, government bonds, and high-yield bonds.

However, while Bitcoin showed returns that are highly unlikely in the traditional finance market, its 2021 performance looks bleak when compared with the rest of the crypto market.

Kraken’s report looked at the top 20 cryptocurrencies by market capitalization excluding stablecoins and found that Bitcoin was the third-worst performing asset. Litecoin’s (LTC) extremely modest 16% return made it the worst-performing asset among the group, while Bitcoin Cash (BCH) posted returns of just 26% and was the second-worst in Kraken’s list.

The year’s outperformer was, unsurprisingly, Shiba Inu (SHIB) which removed Dogecoin (DOGE) from its throne as the king of memecoins. Launched in 2020, Shiba Inu amassed an astronomical 41,800,000% return in 2021—that’s 41.8 million for those unsure about the number of zeros.

The top 20 cryptocurrencies by market capitalization showed an average return of 2,240,000% and a median return of 646%. However, when excluding Shiba Inu and its unprecedented return, the average and median readings drop to 2,524% and 454%, respectively.

Chart showing the return for the top 20 cryptocurrencies by market cap, excluding SHIB

A 12-month long alt season

When accounting only for downside volatility, called the “Sortino Ratio,” Bitcoin remained the third-worst performing asset. The Sortino ratio is a variation of the Sharpe ratio that recognizes the difference between harmful volatility and overall volatility. This ratio is calculated by subtracting the risk-free rate from an asset and then dividing that amount by the asset’s downside deviation. As the Sortino ratio focuses only on the negative deviation of an asset’s return, it’s thought to give a better view of its risk-adjusted-performance. Just like the Sharpe ratio, a higher Sortino ratio result is better.

With a ratio of 1.5, Bitcoin ranked extremely low on the list. Litecoin remained an underperformer here as well, posting a ratio of just 0.9, while Shiba Inu’s outrageous return gave it a Sortino ratio of 35.1.

Polygon (MATIC), Dogecoin (DOGE), Terra (LUNA), and Solana (SOL) were among the top 5 cryptocurrencies with Sortino ratios that came in well ahead of the group’s average and median ratings of 5.3 and 3.5, respectively.

sortino ratio
Chart showing the Sortino ratio for the top 20 cryptocurrencies by market cap

Once the main driving force behind every movement on the market, Bitcoin seems to have taken the backseat in 2021. While Kraken acknowledged that Bitcoin had several historic moments during which it sustained revisions to its levels of dominance, it found that the trend in 2021 was defined by altcoins taking a greater share of the market capitalization.

One of the biggest obstacles to Bitcoin’s significant growth this year was the law of large numbers, which states that an asset cannot sustain the same growth as it increases in market capitalization. And with a market cap of more than $786 billion at press time, it’s hard to show the returns we’ve seen among the low-cap altcoins last year.

“The ebbs and flows associated with market participants shifting their preference for altcoins in favor of BTC and vice versa can help explain the short- and medium-term shifts in the market,” Kraken Intelligence reported.

Diving deeper into Bitcoin’s relationship with the rest of the market also shows another interesting trend—the decrease in Bitcoin’s dominance.

The year started with Bitcoin’s dominance sitting at just under 70%—meaning that 70% of the entire crypto market capitalization was locked in Bitcoin. However, shortly after the year began Bitcoin entered into a 5-month downtrend which ended June as its market dominance dropped to just 39%. According to Kraken Intelligence, this downtrend coincided with the broader market sell-off in May, which led to several months of slow rebounding for Bitcoin.

Throughout the second half of 2021, Bitcoin’s dominance was largely range-bound between 40% and 50%. This is a result of a rather interesting phenomenon—the majority of market participants see Bitcoin as a safe-haven asset within the crypto ecosystem. This view of Bitcoin means that most traders tend to trade back into Bitcoin to preserve their wealth and avoid drawdowns that hit altcoins the hardest.

The post Bitcoin was the third-worst performer last year as low cap altcoins showed the biggest returns appeared first on CryptoSlate.

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Top Energy Stocks to Watch in 2022 to Capture the Electrifying Growth

Despite being one of the worst-performing sectors over the past 10 years, the top energy stocks are now leading the stock market.
The post Top Energy Stocks to Watch in 2022 to Capture the Electrifying Growth appeared first on Investment U.



Despite being one of the worst-performing sectors over the past 10 years, the top energy stocks are now leading the stock market. With inflation hitting a 39 year high in the U.S, cyclical stocks are back on top.

In fact, the Energy Select Sector SPDR Fund (NYSE: XLE) is up over 55% in the past year. Even more, the top energy stocks are off to a good start in 2022, pushing the ETF up over 13% so far.

After oil prices fell drastically when the pandemic first hit, prices are climbing back to their highest price since 2014. With this in mind, high inflation readings tend to benefit commodity stocks as investors look for less risk.

Not only that but with interest rates likely going up this year, crowded trades like tech stocks are getting clobbered.

Having said that, diversifying your portfolio with commodities can help buffer the impact. Keep reading to find the top energy stocks to watch in 2022 to boost your returns.

Top Energy Stocks for Growth Investors

Tech isn’t the only sector with growth leaders. Several energy stocks are leading the charge as profit margins are improving and more is being returned to shareholders. Given this, here are the top energy stocks for capturing growth.

Devon Energy (NYSE: DVN)

  • Market Cap: 34.5B
  • 1 Yr. Return: 167%
  • 1 Yr. Revenue Growth: 214%

Devon Energy is outperforming the market, making it one of the top energy stocks. It’s surging by 167% in the past year to lead the S&P 500 index. The oil and gas exploration company holds a diverse portfolio of oil volumes (50%), gas volumes (26%) and NGL volumes (24%).

However, DVN is making strategic moves to further its position. A few weeks ago, Devon merged with rival WPX Energy to create one of the largest shale producers in the U.S. Although the deal dilutes ownership, it will help boost cash flow with a larger presence in the Permian Basin.

More importantly, the company is using the excess cash flow to reward shareholders. For example, Devon announced a $1 billion share buyback program on top of a 71% dividend increase.

The company now pays a generous dividend yielding around 7% as DVN expects the growth to continue.

Diamondback Energy (Nasdaq: FANG)

  • Market Cap: 22.6B
  • 1 Yr. Return: 112%
  • 1 Yr. Revenue Growth: 165%

Diamondback Energy is another oil exploration company with an interest in the Permian Basin. So far, the company’s reserves include 58% oil, 20% natural gas, and another 22% natural gas liquids.

Like Devon, FANG stock is outpacing the competition, up 112% in the past year. Strong demand is pushing crude oil prices higher, helping boost the company’s cash reserves. Diamondback’s latest earnings shows the company has $457 million in cash. The company is planning to use the money to pay down debt and return to shareholders.

With this in mind, FANG is committing to a 50% free cash flow return for investors. The company pays a $2 annual dividend thus far, yielding around 1.6%.

Top Energy Stocks for Value Investors

The growth vs. value debate is an ongoing controversy among investors. Growth stocks have had the edge the past few years, but value stocks are outperforming growth so far this year. That said, here are the top energy stocks for value investors.

Exxon Mobile (NYSE: XOM)

  • Market Cap: 311.58B
  • 1 Yr. Return: 62%
  • 1 Yr. Revenue Growth: 58%

As one of the world’s largest publicly traded oil companies, Exxon Mobile, is involved in all aspects of the process. The company’s business segments include upstream, downstream, and chemical.

With gas prices increasing over their 10-year range, Exxon is seeing improved margins across all segments. Exxon also used the excess free cash flow in the third quarter to improve fundamentals. In light of this, XOM paid down its debt by $4 billion, bringing debt to capital to 25%.

Not only that, but this top energy stock distributed another $3.7 billion in dividends. With its latest dividend increase to $0.88 per share, the payout yields nearly 5%.

And on top of this, several investments are starting to pay off in Guyana and the Permian. The offshore projects are creating promising growth potential in the next few years.

Phillips 66 (NYSE: PSX)

  • Market Cap: 38.85B
  • 1 Yr. Return: 24%
  • 1 Yr. Revenue Growth: 90%

Phillips 66 is another one of the top energy stocks. It’s best known as an oil refiner. But the company is branching out into other revenues sources such as chemicals and midstream. So far, PSX operates 13 refineries in the U.S. and Europe with production capabilities of 2.2 million barrels of crude oil per day.

As more people get back to their everyday lives, gasoline demand rises. And as a refiner, PSX is at the heart of production. So, the higher demand is significantly improving earnings and margins.

Like the other energy companies on this list, PSX uses extra cash to improve its balance sheet. In the company’s Q3 earnings, PSX noted paying down debt by $1 billion so far in 2021.

Another key thing to note from the report, PSX is buying out all public partners. The move will help integrate the business while further improving margins.

PSX also offers an attractive annual dividend of $3.68 per share, or a 4.15% yield/

Risks to Consider When Investing in Energy Stocks

Although the stocks listed are up significantly in the past year, these are also the top energy stocks right now. Investing in the energy sector can be challenging with so many changing variables.

Having said that, the sector is heavily influenced by changes in the economy. When the pandemic first hit, oil prices cratered, causing businesses to take on more debt. You can see how easily things can change from March 2020 to where we are now.

Now that oil prices are recovering, we are seeing improving margins. And as a result of the extra cash, companies are reducing debt while rewarding investors.

The past ten years have not been very rewarding for energy investors. But, with OPEC capping supply levels, it looks like higher margins will continue this year. If demand remains strong, we will likely see much of the same in 2022.

The post Top Energy Stocks to Watch in 2022 to Capture the Electrifying Growth appeared first on Investment U.

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Top 4 Oil Stocks to Buy for Profiting from Exploration and Production Growth

Top 4 oil stocks to buy for profiting from exploration and production growth offer a potential gusher of opportunity. The top 4 oil stocks to buy for profiting from exploration and production (E&P) growth should be fueled by a 22% rise in global drill



Top 4 oil stocks to buy for profiting from exploration and production growth offer a potential gusher of opportunity.

The top 4 oil stocks to buy for profiting from exploration and production (E&P) growth should be fueled by a 22% rise in global drilling & completion (D&C) spending in 2022 to mark the strongest annual jump since 2006, according to BofA Global Research. After a couple of tough years for the oilfield services (OFS) industry, BofA is predicting that this year could be one of robust D&C spending growth.

Unlike the prior cycle that was dominated by U.S. D&C spending growth, international spending is expected to be strong in 2022. As a result, BofA is projecting a broadened D&C spending recovery in 2022, including U.S. and international growth of 37% and 15%, respectively.

Top 4 Oil Stocks to Buy for Profiting from Exploration and Production Spending

E&P companies in the oil and gas industry are engaged in the early stage of energy production known as the upstream segment of the business. E&P involves searching for and extracting oil and gas from the ground. 

Typically, E&P companies do not refine or produce energy but instead focus on finding and extracting raw materials. Midstream activities follow with companies that specialize in storing, processing and transporting the crude oil and raw natural gas products. The function of midstream companies is to operate tanker ships, pipelines and storage facilities to help move those raw materials and prepare them for the downstream process that refines the resources into fuels and finished products for marketing, distribution and sale.

Energy is one of the limited number of industries that are benefitting from the current rising yield environment. Increased prices have helped oil stocks and are producing buying opportunities for investors, according to the Jan. 18 issue of the Fast Money Alert trading service led by Mark Skousen, PhD, and Jim Woods. 

Mark Skousen, a descendent of Benjamin Franklin, meets with Paul Dykewicz.

Top 4 Oil Stocks to Buy for Profiting from Exploration, Production and Inflation

Crude oil prices are surging on a combination of rising inflation, steady demand and a constricted supply, Skousen and Woods opined.

“Those rising prices have created a bullish setup in several oil stocks,” wrote Skousen and Woods. Skousen, named one of the world’s Top 20 living economists by, is the leader of the Forecasts & Strategies investment newsletter, as well as the Five Star Trader, TNT Trader and Home Run Trader advisory services. Woods writes the Successful Investing and Intelligence Report investment newsletters, as well as heads the Bullseye Stock Trader and High Velocity Options advisory services.

Jim Woods and Paul Dykewicz discuss stocks to buy now.

BofA reports it has been watching the private U.S. exploration and production companies closely, forecasting their rig activity is now above pre-COVID levels. However, the public U.S. E&Ps are still 45% below pre-COVID levels.

While public E&Ps will take their activity levels modestly above maintenance, likely producing 20%-plus year over year (y/y) growth in the group’s capital expenditures (capex), private E&Ps should provide the biggest increases in 2022. For example, BofA expects private E&P capex to surge by roughly 55% in 2022. Overall, U.S. E&P capex is projected by BofA to rise 37% this year, including 10% due to inflation.

Top 4 Oil Stocks to Buy for Profiting from Exploration and Production

Energy stocks had a strong finish to 2021 and most of the reasons for it continue in 2022, said Bob Carlson, who heads the Retirement Watch investing newsletter. Inflation is likely to remain high for much of 2022 and perhaps longer, helping to power energy stocks that traditionally serve as a good inflation hedge for such conditions.

“In addition, capital investments in the energy sector lagged the last few years, continued Carlson, who also serves as chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. “Capital investments aren’t going to surge enough to increase supply anytime soon. In fact, some governments are discouraging or prohibiting additional investments in traditional energy sources, and many banks and other capital sources reduced their exposure to the sector as part of their environmental policies.”

The result is demand likely will surpass supply for a while, absent a recession, Carlson counseled. Many energy companies, especially the shale oil producers, have made clear that they will be more friendly to shareholders going forward. Instead of investing heavily to maximize production, they will focus more on profitability and ensuring shareholders have cash distributions and stock price appreciation, he added.

Pension fund and Retirement Watch chief Bob Carlson answers questions from columnist Paul Dykewicz.

BofA’s Top 4 Oil Stocks to Buy for Profiting from Exploration and Production

With BofA preferring oil stocks that have more exposure to the United States E&P market, it recommended Halliburton (NYSE: HAL), with dual headquarters in Houston and Fort Worth, Texasa. BoA rated HAL as a buy and the “best-in-class” North American, large-cap E&P stock.

The investment firm released a research report recently that described Halliburton as its favorite offshore large-cap investment in the sector. One reason is that U.S. E&P capital discipline has reduced the sensitivity of domestic activity to oil prices, it noted.

But with oil now at $80, U.S. onshore activity may have underappreciated upside that will help to drive further gains for HAL’s consensus estimates, BofA continued. Amid that positive outlook, BofA reiterated its buy rating and raised its 2022 / 2023 earnings per share (EPS) and earnings before interest, taxes, depreciation and amortization (EBITDA) estimates to $1.85 / $2.66 and $3,659 million / $4,770 million, respectively.

For those who like value-added charts, Stock Rover has provided such visual demonstrations of the recent track record of HAL and BofA’s other three recommended oil stocks of BofA. 

The Williams indicators in the illustrative Stock Rover charts show momentum, with 0 to -20 (shaded in red) considered overbought and -80 to -100 regarded as oversold. The accompanying Stock Rover charts also are overlaid with a volume indicator.

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In addition, charts that feature Keltner Channels are a more informative variation on moving average lines.

Chart generated using Stock Rover.

NEX Joins Top 4 Oil Stocks to Buy for Profiting from Exploration and Production

Among the smallest 2,500 stocks within the broad S&P benchmark, three of those small- and mid-cap oil companies focusing on D&C received buy recommendations from BofA. One of them is Houston-based NexTier (NYSE: NEX), a land oilfield service company that has a diverse set of well completion and production services.

NexTier gained a buy recommendation from BofA partly as the “best way” to invest in tightening pumping fundamentals. Specifically, BofA is positive on U.S. hydraulic fracturing (a.k.a. pressure pumping) fundamentals. Basically, attrition is tightening the fracturing market much more quickly than investors might expect even though the crew count is still well below 2019 levels. 

Despite NEX’s recent rise, the stock still appears undervalued, BofA added. Continued execution and market tailwinds should help this “exceptionally cheap” stock re-rate as consensus estimates move higher this year, the investment firm added.

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As such, BofA affirmed its buy rating on NEX and raised its 2022 / 2023 EBITDA estimates to $329.9 million / $426.1 million.

Chart generated using Stock Rover.

Top 4 Oil Stocks to Buy for Profiting from Exploration and Production: PTEN

Patterson UTI (NASDAQ: PTEN), a Houston-based provider of oilfield services and products to oil and natural gas E&P companies in the United States and other select countries, offers contract drilling, pressure pumping and directional drilling services. BofA wrote that rig count upside exists to drive day-rate momentum for PTEN.

The company is rated as BofA’s favorite land driller. Key reasons are (1) higher leverage to U.S. private E&Ps, (2) lower capex requirements, especially when compared to competitors, and (3) cheaper valuation than its closest peer, BofA opined.

“Furthermore, we think U.S. horizontal rig activity could end the year around 650 rigs, which implies more than 100 rigs added between now and the end of the year,” BofA wrote in a recent note. “And if activity plays out like we think this year, we expect day rates to climb into the mid-$20,000 range as total Super Spec rig utilization eclipses 90%.”

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Upon taking all these factors into account, BofA reiterated its buy rating, while raising its 2022 / 2023 EBITDA estimates on the stock to $426.7 million / $594.3 million.

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Top 4 Oil Stocks to Buy for Profiting from Exploration and Production: WHD

Cactus Wellhead (NYSE: WHD), of Houston, designs, manufactures, sells and rents a range of highly engineered wellhead and pressure control equipment. Its products are sold and rented principally for onshore unconventional oil and gas wells and are used during the drilling, completion and production phases of its customers’ wells.

In addition, Cactus Wellhead provides field services for all its products and rental items to assist with the installation, maintenance and handling of the wellhead and pressure control equipment. BofA forecasts U.S. drilling upside that could give WHD’s margins tailwinds.

WHD, with a 40%-plus share of the U.S. wellhead market, is set to benefit from continued momentum in U.S. drilling activity, BofA predicted. Plus, the investment firm forecast that the company’s product segment could be helped if its input costs, such as steel, come down even as Cactus Wellhead has had success boosting prices to offset inflationary pressures, BofA added.

“Keep in mind, though, that typically WHD does not have to concede some of the price gains captured previously as input costs come down, which is a possible added catalyst for margins in 2022,” BofA wrote. “Therefore, we reiterate our buy rating.”

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BofA raised its 2022 / 2023 EBITDA estimates to $193.4 million / $272.5 million.

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Underappreciated Free Cash Flow Growth for the Oilfield Service Sector

With the oil and gas industry entering its “twilight years” amid a global push toward clean energy sources, investors have begun to focus more on free cash flow and less on growth, BofA wrote. With activity on the rebound and oilfield service pricing set to climb this year, the oilfield services sector is positioned to generate significant growth in free cash flow.

At this point in the cycle, cash flow growth really doesn’t require much, if any, growth capex, BofA added. Plus, use of the U.S. dollar to price oil favors such stocks, so any decline in the greenback compared to other currencies should increase the prices of oil and other forms of energy.

There are 21 stocks in the energy sector of the S&P 500. At the end of 2021, those stocks had a combined market value of about $1 trillion. That’s about a third of Apple’s (NASDAQ: AAPL) $3 trillion market value and a little more than the 2021 increase in the technology company’s market capitalization, Carlson commented.

 Omicron Variant of COVID-19 Dominates U.S. Cases

The economy is affected by the Omicron variant of COVID-19 causing 99.5% of new coronavirus cases in the United States last week to show a slight increase from the previous week, according to Jan. 18 estimates from the U.S. Centers for Disease Control and Prevention. The Delta variant accounts for the remaining 0.5%.

An average of 750,000-plus new COVID-19 infections were reported every day over the past week, according to data from Johns Hopkins University. The U.S. Department of Health and Human Services reported that 156,000 people were hospitalized with COVID-19 on Jan. 16, based on the most recent data available at press time.

Reports indicate that the recent surge in COVID cases is causing some hospitals to run out of space to treat other patients in intensive care units. A squeeze also is occurring in the travel industry due to canceled flights from rising COVID cases, as workers at airlines, airports and related retailers call in sick.

COVID-19 Concerns Continue as Cases and Deaths Keep Climbing

The Centers for Disease Control and Prevention (CDC) reported that the variants still are spurring people to obtain COVID-19 boosters. But more than 60 million people in the United States remain eligible to be vaccinated but have not done so, said Dr. Anthony Fauci, the chief White House medical adviser on COVID-19.

As of Jan 18, 249,393,487 people, or 75.1% of the U.S. population, have received at least one dose of a COVID-19 vaccine, the CDC reported. Those who are fully vaccinated total 209,312,770, or 63% of the U.S. population, according to the CDC.

COVID-19 deaths worldwide, as of Jan. 18, topped the 5.5 million mark to hit 5,554,152, according to Johns Hopkins University. Worldwide COVID-19 cases have zoomed past 333 million, reaching 333,705,640 on that date.

U.S. COVID-19 cases, as of Jan. 18, soared beyond 67.5 million, totaling 67,581,992 and causing 853,951 deaths. America has the dreaded distinction as the country with the most COVID-19 cases and deaths.

The four stocks to buy for profiting from oil exploration and production growth give investors a chance to buy shares in stocks that are in an industry that until recently had lost favor due to its use of fossil fuels in an era of climate consciousness. Open-minded investors willing to invest in those stocks while they are on the rise and many other sectors are struggling could outperform the market this year.

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