Equities suffered a brutal third quarter amid the global energy crisis, and the nightmarish scenario appears nowhere near over. Last month, Russia completely shut down its gas supplies to Europe via the Nord Stream 1 pipeline. Energy prices surged, driving inflation to new highs in the Eurozone.
“The energy crisis brings a huge amount of unknowns and concerns in the market,” said Clive Burstow, Barings’ London-based head of global resources. “High prices are driving inflation and pushing industrial capacity offline, which is worsening an already constrained supply chain.”
The surge in power prices and threats to supply are affecting businesses from China to the US, leaving investors with a challenge to figure out where to put their money. While the crisis has dampened profits and revenues for many names, some tickers stand to benefit in the wake of Russia’s unreliability to supply Europe with gas; if you know where to look. In this article, our team examines three of our top choices from areas of the market that are bucking the downward trend.
Oil and gas prices spiked earlier in the year due to Russia’s invasion of Ukraine and could spike again into 2023 due to the energy crisis in Europe this winter. Energy stocks have dramatically outperformed the broader market, as evidenced by the 42% YTD gain for the Energy Select Sector SPDR ETF (XLE).
The International Energy Agency (IEA) expects global energy demand to increase by more than 30% by 20. APA Corp. (APA) is one of the few oil and gas exploration and production companies offering exposure to the meteoric rise in gas prices.
In the second quarter, APA saw $3.05 billion in total revenue representing 71.3% year-over-year growth with strength across oil, natural gas, and natural gas liquids (NGLs). Adjusted earnings grew 205% from the prior-year quarter to $811 million. Adjusted EPS increased 239% from the prior year period to $2. . Analysts expect Q3 revenue to be $2.63 billion, indicating a 59.2% year-over-year increase. APA’s earnings are expected to increase 145% year-over-year to $2.40.
MKM Partners analyst Leo Mariani recently raised the firm’s price target on APA from $45 to $50, citing international natural gas prices having reached record levels driven by the cut-off of most Russian gas into Europe as well as outages and maintenance on a few major global LNG facilities around the world.
The stock garners a Buy rating and a $52.50 median price target, representing a 30% increase from the current price. With a low TTM price-to-earnings ratio of 4.5, APA seems like a bargain against peers.
In response to Russia’s inability to supply Europe with gas, European policymakers are revisiting the possibility of nuclear power to meet their energy needs. On July 6, EU lawmakers voted in favor of adopting nuclear energy as a clean and green energy source. In February 2022, France announced plans for up to 14 new nuclear reactors by 2050 in an effort to reduce its dependence on fossil fuels.
According to a report by Report Linker, the global nuclear electricity market to grow to $179.89 billion in 2022, from $166.13 billion in 2021, at a CAGR of 3%. By 2026, the global nuclear electricity market is expected to hit a valuation of $239.17 billion in 2026, registering a CAGR of 7.4%.
Leading manufacturer and supplier of nuclear components, BWX Technologies, Inc. (BWXT) stands to benefit from nuclear power’s expansion. The company recently announced that it had been awarded a contract by the US Department of Defense Strategic Capabilities Office to build the first advanced nuclear microreactor in the United States.
On August 8, BWX reported Q2 earnings per share of $0.82 and beat estimates by $ .07. The company’s revenue amounted to $554 million, up 9.7% year over year, and outperformed Wall Street expectations by $9.87 million.
BWXT looks like a bargain at just 15.85 price-to-earnings. The stock has gained 8.4% this year and is offering a forward dividend yield of 1.71%, which the company supports with free cash flows of $64 million. The current consensus among seven analysts offering recommendations is to Buy BWXT shares. A median price target of $65 represents a 23% increase from the current level.
Amid the global energy crisis, defense stocks are a solid choice. “You’re immune from economic shock because the market for defense goods bears no relation to commercial demand for anything in the civil economy,” said Richard Aboulafia, a managing director with AeroDynamic Advisory.
What better way to tap into the potential of defense contractors than through an Exchange Traded Fund (ETF). for investors seeking exposure to just the top names in the industry and those that are most impacted by the trends of the sector, the iShares US Aerospace & Defense ETF (ITA) provides exposure to the aerospace and defense sector where companies tend to be rather large, slow growing, but remarkably stable due to the widespread use of long-term government contracts for most of their services.
ITA tracks a market-cap-weighted index of US-listed manufacturers, assemblers, and distributors of aircraft and aircraft parts primarily used in commercial or private air transport and producers of components and equipment for the defense industry, including military aircraft, radar equipment, and weapons. The fund caps its holdings to meet diversification requirements, limiting a single company to 22.5% of its assets and preventing unbiased exposure to the top few that dominate the industry. Concentration risk remains high despite the caps, reflecting the undiversified nature of the industry. Despite this, ITA still allocates holdings to a mixture of large, mid, and small-cap companies. The fund uses a representative sampling strategy instead of replicating the underlying index. The index is rebalanced quarterly.
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