🗞️ The Meeting is Over, Send the Orders

WHILE YOU POUR THE JOE… ☕️ 
Papa Powell Sent Bonds Running (Again)

You don’t have to be a stock market wizard to know that the Federal Reserve is finally considering cutting interest rates soon, meaning over the next 6-9 months⌛️.

We got some encouraging data on Monday, all inside the ISM manufacturing PMI index report, which we kindly offered for free that day, follow the instructions on this publication to get yours (it’s free).

Anyways, prices retreated to a near-flattish level for the month, and contracting manufacturers will only help relieve some of the inflation and wage pressure that the Fed is now facing.

So, Powell (the Fed’s Chairman) hinted at feeling more comfortable considering cutting interest rates soon, sending 10-year bond yields lower📉.

In plain English, stocks tend to move opposite to where interest rates are going, and bond yields are a proxy for where markets think interest rates will go.

Bond yields down = Interest rates expected lower = Stocks higher today.

And if you’re wondering which stocks could be the ones to best perform in the next few months, well, that’s the subject of today’s email📧…

STRATEGIZE LIKE A HEDGE FUND PRO
There Can Be Only One: Oil

If you participated in Monday’s request, then feel free to open your Manufacturing PMI sheet and follow along. If you don’t have it, you can get it by emailing [email protected] with the subject line “I’m ready for my model.”

Anyway, here’s what we found👀 in the latest release of manufacturing data:

The manufacturing PMI index has read under 50% for 20 consecutive months, except for April 2024, which barely counts as it wasn’t a true directional reading.
Quick tip: Readings above 50% mean expansion, below 50% mean contraction 🔎

We did the math, and there’s an 88% one-year lagging correlation between the ISM manufacturing PMI and the U.S. stock market. This means that whenever the PMI expands for a few consecutive months, there’s an 88% chance that the market will rise, and vice versa for contraction.

Notice in the graph how the PMI (blue) precedes stock market (gray) rallies and crashes until 2022. This could mean the market is overvalued, but not all stocks are equal.

Oil has been leading in expansion readings for 4 consecutive months, showing that it is virtually the only industry that could deliver higher earnings per share 📈(corporate profits) in the coming quarters.

And that’s where we want to position ourselves. But where?

The market is willing to pay the most today for tomorrow's earnings in the production and pipeline industry. As the saying goes, "It must be expensive for a reason."

Considering that gas prices in the U.S. are on the rise, something that gives the Fed something to worry about, ramping up production could be front and center for the country, which is why the market is overpaying for those stocks💰️.

But there's a caveat. President Biden took out most of our production to protect the environment… sigh. So, this also tells us something about November's election.

Markets are betting on Trump's victory and bringing back oil production to its former highs. The PMI readings led us straight to an election side bet, nice.

Which stocks in this space are worth taking a look at? Here's a spread of the production and pipeline industry to gauge that question out:

There really are only two of them, selected by the following criteria:

1. Higher than average forward P/E (shown in the PE2 column)

2. Higher than average earnings growth for the next 12 months (shown in EG2 column)

As it turns out, markets are willing to pay more for the stocks that are positioned to grow more, duh 🙄.

The Williams Companies (NYSE: WMB)

This company is focused more on natural gas, with some oil market exposure, but here’s where it gets interesting.

Natural gas prices tend to follow oil, but that hasn’t been the case lately, making for a straight arbitrage play that turns out to be bullish for natural gas and, therefore, bullish for Williams.

It's good that the company is positioned in Texas and Florida, as one is becoming the new tech capital 💻️ of the U.S., and the other is actively being called "Wall Street South."

Data centers helping A.I. do its thing in Texas will need lots of electricity. This creates a significant tailwind for the stock setup to provide the state with these power needs.

Without data and high bandwidth power structures, finance won't be finance, so FL is also a significant market for Williams to provide natural gas.

Analysts at Morgan Stanley took this to heart and slapped a $48 per share price target on the stock, calling for a 14% upside🔥.

But that seems a bit conservative, considering the company now reports record contracted capacity and record EBITDA for the quarter. There's a reason the market is still willing to overpay for this stock.

Expro Group (NYSE: XPRO)

An advantage to this one is that it is a smaller company, with only a $2.5 billion market cap versus $51.8 billion for Williams. The main one is that Expro can grow its earnings much faster, and Wall Street forecasts 27.5% alone for this year.

Backing these projections is management itself, riding on the tailwinds of the energy sector and giving investors a new reason to look into the stock:

The market is letting you know two things through the valuation in these two companies.

1. They expect US production to ramp up through a potential Trump win in November’s election, so they bid up Williams stock

2. The hedge is found in Expro, since the company is diversified more into international markets, which will carry on the US’s oil production deficit if need be

Kinda brilliant, but that’s how the industry works, long and short, be right and wrong at the same time and you will make it out okay👍️.

STOCK OF THE WEEK
Barking at The Wrong Stock

Remember what GameStop Corp. (NYSE: GME) did in 2021? That stock's stratospheric rise - and collapse - was the subject of so much attention that even a movie was made about it; it's called Dumb Money.

The same person who made GameStop skyrocket, Twitter user RoaringKitty, known as Deep Value, also known as Deep F*cking Value is now going after Chewy (NYSE: CHWY) stock.

After announcing a large position in the company, the stock rallied by over 20%, just to crash again well below the price it was trading at before Kitty tweeted about it.

It may be a bad sign for those used to investing into momentum, but Chewy stock is trading at only 63% of its 52-week high 📉.

But, that also gives those savvy enough an opportunity to watch this stock, investors just like you and me.

It's One of The Safest Stocks Out There
Think about it, no matter if the economy is booming or busting, pet owners will always make room in their budgets 🪙to take care of the furry members of the family.

This fundamental factor makes Chewy stock less cyclical than meets the eye, and that high cash flow predictability and stability makes for a great company; here's what it looks like under the hood:

• The company’s free cash flow (operating cash flow minus capital expenditures) has been growing from $8 million up to $300 million in only 3 years.

• This newfound profit stability let the company’s EPS triple over the past year.

• Wall Street forecasts up to 63.6% growth in EPS for the next year, with those at Wedbush valued the stock at $35 a share, calling for up to 41.1% upside 🔥from where it trades today.

NOW GO AND MAKE IT HAPPEN
World Energy Sounding Board

Today’s book recommendation 📖 includes one of my personal favorites. It’s a bit heavy and slow, definitely not a page-turner.

But, if you can get through it and give each chapter deep thought, you will realize just how wrong today’s energy assumptions are, especially surrounding renewables and other ‘green’ projects that captivated the hearts of many vegans.

To your success,

G. 🥃