By Philip van Doorn, MarketWatch
Spencer Platt/Getty Images
Wall Street analysts once again are betting big on oil and gas producers.
This may see like a case of déjà vu, considering what were their favorite calls as this year began. And they may eventually be right about prices for oil and other commodities, and therefore the financial prospects for energy stocks. But based on recent developments, including the decision by major producers not to cut production, investors need to be picky and patient.
As investors look toward 2016, the typical 12-month period for Wall Street price targets may be a very short investment horizon given how long it may take oil prices to recover to anywhere near the levels they were hitting in the first half of 2014.
First, a painful look back
Here’s how that list has performed since we pulled it on Jan. 5:
|Company||Ticker||Industry||Total return - Jan. 5, 2015 through Dec. 18, 2015||Total return - 2014|
|Freeport-McMoRan Inc,||/zigman2/quotes/200215692/composite FCX||Precious Metals||-71%||-36%|
|Nabors Industries Ltd.||/zigman2/quotes/210293936/composite B /zigman2/quotes/202661377/composite NBR||Contract Drilling||-33%||-23%|
|QEP Resources Inc.||Oil and Gas Production||-37%||-34%|
|Range Resources Corp.||/zigman2/quotes/205059849/composite RRC||Oil and Gas Production||-59%||-36%|
|EQT Corp.||/zigman2/quotes/209305691/composite EQT||Oil and Gas Production||-33%||-16%|
|Noble Energy Inc.||Oil and Gas Production||-26%||-30%|
|Wynn Resorts Ltd.||/zigman2/quotes/208845907/composite WYNN||Casinos/ Gaming||-55%||-21%|
|Newfield Exploration Co.||Oil and Gas Production||27%||10%|
|Williams Cos. Inc.||/zigman2/quotes/205467183/composite WMB||Oil and Gas Pipelines||-47%||21%|
|Quanta Services Inc.||/zigman2/quotes/203420082/composite PWR||Engineering and Construction||-28%||-10%|
One winner in 10 picks is a terrible record. Analysts may have been slow to believe that the 47% plunge in crude prices during the second half of 2014 was more than a typical market disruption. With hindsight, it’s obvious that the increase in U.S. shale production has changed the game. The Organization of the Petroleum-Exporting Countries realized this before Wall Street did, and the cartel is clearly willing to put up with a long-term price squeeze to kill off its new competition.
Rather than the usual OPEC production cut followed by a price bounceback, Saudi Arabia and the rest of OPEC has increased its production level as it tries to wipe out the “new kids on the block.”
The global supply glut means West Texas crude has declined another 32% this year, through Friday, and the average U.S. gas price at the pump on Monday dropped below $2 for the first time since 2009. Early Monday, West Texas Crude oil for February delivery /zigman2/quotes/209723602/delayed CLF26 -1.06% , the new most-active contract, was down another 1.4% to $35.58 a barrel.
Looking ahead — A new list, still dominated by energy
For our new list of Wall Street’s favorite stocks, we toughened up the criteria. Instead of requiring a majority of analysts to rate a company the equivalent of a “buy,” we made it two-thirds. That narrowed the list to those where analysts have the strongest conviction. The favorite names continue to be centered around the beleaguered energy sector, even as the U.S. oil-drilling rig count actually increased last week.
Here are the 10 S&P 500 stocks with “buy” or “overweight” ratings among at least two-thirds of sell-side analysts, with the greatest implied upside potential over the next 12 months, based on consensus price targets:
|Company||Ticker||Industry||Closing price - Dec. 18||12-month consensus price target||Implied upside potential||Share of ‘buy’ ratings|
|Range Resources Corp.||/zigman2/quotes/205059849/composite RRC||Oil and Gas Production||$21.33||$45.53||113%||67%|
|NRG Energy Inc.||/zigman2/quotes/208308731/composite NRG||Electric Utilities||$10.37||$20.00||93%||75%|
|Devon Energy Corp.||/zigman2/quotes/209479244/composite DVN||Oil and Gas Production||$28.67||$54.65||91%||68%|
|Anadarko Petroleum Corp.||Oil and Gas Production||$45.67||$79.73||75%||79%|
|EQT Corp.||/zigman2/quotes/209305691/composite EQT||Oil and Gas Production||$48.92||$83.32||70%||77%|
|Ryder System Inc.||/zigman2/quotes/208674852/composite R||Finance/ Rental/ Leasing||$54.08||$91.67||70%||73%|
|Western Digital Corp.||/zigman2/quotes/204213617/composite WDC||Computer Peripherals||$58.86||$93.86||59%||71%|
|Baker Hughes Inc.||Oilfield Services/ Equipment||$43.92||$67.08||53%||76%|
|Navient Corp.||/zigman2/quotes/204528402/composite NAVI||Finance/ Rental/ Leasing||$11.92||$18.00||51%||80%|
|WestRock Co.||/zigman2/quotes/202346656/composite WRK||Containers/ Packaging||$44.09||$65.44||48%||79%|
Despite Wall Street’s optimism, your investment horizon may well need to be a lot longer than 12 months if you are looking to make huge gains on an energy rebound. So do your own research and decide for yourself whether you have confidence in companies’ strategies to thrive during this period of weak commodity prices.