While stock prices continue to bounce around following their tumble earlier this year, crude oil is back near new highs. In fact, despite the stock market’s super run in 2017, crude oil actually outperformed stocks starting in June. And it continues to do so here in April 2018.
That means investors have a choice during the current volatile environment for stocks. And that does not necessarily mean speculating in commodities. Energy stocks representing companies that explore, drill, produce and refine oil finally look positioned to lead the stock market to the upside.
How can this be? For years, the fundamentals of “black gold” were rather dour. It was fairly common to see headlines saying, “the world is awash in oil” or “crude oil inventories rise again.” Indeed, the U.S. became a net exporter of oil in May 2011 and the third-largest producer of crude oil in 2014, after Saudi Arabia and Russia.
That is, until this year.
While neither the technical or fundamental side is signaling a return to $100-per-barrel oil prices any time soon, the tone of the market is bullish. The question is: What should investors buy?
Best Value Stocks To Watch Right Now: Maxim Integrated Products, Inc.(MXIM)
This company supplies some chips to Samsung for the red-hot Galaxy line. Maxim Integrated Products Inc. (NASDAQ: MXIM) designs, develops, manufactures and markets various linear and mixed-signal ICs worldwide. The company also provides a range of high-frequency process technologies and capabilities for use in custom designs. It primarily serves automotive, communications and data center, computing, consumer and industrial markets.
While the company only posted inline fourth-quarter numbers, it did offer strong guidance on auto, industrial, data center strength and above seasonal consumer (Samsung, Nintendo). That could prove to be a big plus when it is expected report first-quarter results on April 26.
The Merrill Lynch team has favored Maxim for some time as the company continues to generate significant cash and targets 80% payout ratio. The company’s dividend yield is near its five-year average, and the company has grown its dividend in each of the past six years. The favorable view is based on expectations of continued strong growth in automotive with solid double-digit year-over-year growth and continued strength in its industrial segment.
Shareholders of Maxim are paid a 3.09% dividend. The $68 Merrill Lynch price objective is above the posted consensus target of $61.18. The shares closed most recently at $54.40 apiece.
Best Value Stocks To Watch Right Now: Paycom Software, Inc.(PAYC)
I’ll be the first to admit that growth investing is not my style. I don’t want to have to be right. Being right is hard. Instead, I want such a large margin of safety that I can be wrong to a degree and still have a positive outcome. High-priced growth stocks generally don’t offer that.
While I wouldn’t buy shares of Paycom Software at today’s prices, I like the company. Paycom offers a cloud-based solution for payroll processing and other human resources tasks. What’s notable about Paycom is that the company is solidly profitable. Many fast-growing software-as-a-service (SaaS) companies pour resources into sales and marketing to juice their growth at the expense of the bottom line. Paycom is different.
IMAGE SOURCE: GETTY IMAGES.
In 2017, Paycom grew revenue by 31% to $433 million. Sales and marketing expenses ate up just 34% of revenue. Compare that to an unprofitable SaaS company like HubSpot, which spent 57% of revenue on sales and marketing last year. As a result of Paycom’s efficiency in winning new business, the company managed a GAAP operating profit of $78.6 million, good for a double-digit operating margin.
You don’t find SaaS companies like this very often, able to grow revenue at a brisk pace while generating fat margins. Unfortunately, the market recognizes this excellence, pricing the stock at a whopping 96 times last year’s GAAP earnings. If your holding period is 50 years, the company should eventually grow into that valuation, assuming it continues to perform well. If it doesn’t perform well, the stock has a lot of room to fall.
If I were forced to buy a growth stock and hold it for decades, I would pick a company that has a proven business model and a track record of strong profitability. Paycom would be at the top of my list.
Best Value Stocks To Watch Right Now: GlaxoSmithKline PLC(GSK)
GlaxoSmithKline Plc (ADR) (NYSE:GSK) has kept its dividend frozen since 2012 and has impressively paid uninterrupted dividends for nearly 20 consecutive years. When combined with its high yield and seemingly conservative payout ratio below 40%, it’s no wonder why the stock is popular with income investors.
However, the pharmaceutical giant is facing real growth struggles as branded and generic competition eats away at the pricing of its core drugs.
With pressure to continue expanding and its dividend consuming a meaningful amount of cash flow, it’s not out of the question that GlaxoSmithKline might opt to reduce its dividend to free up growth capital and keep its balance sheet in good shape.
GlaxoSmithKline has a Dividend Safety Score of 30 from Simply Safe Dividends, indicating that its payout is potentially unsafe and has a heightened risk of being cut in the future.
Best Value Stocks To Watch Right Now: Booking Holdings Inc.(BKNG)
It’s hard to bet against Netflix, especially immediately after the streaming video giant just announced another quarter of strong financial performance. Yet Netflix is having to make a transition away from simply being a conduit for delivering other people’s content to a willing audience of viewers, spending billions to come up with its own exclusive content instead. That’s a smart move for the company, and it could promote long-term growth, but it still requires a big investment and fundamentally changes the nature of the business.
By contrast, Booking Holdings has largely been able to stick with its successful business model of offering a wide range of accommodations and other travel services using the internet. Its recent name change reflects the transition the company has made, with consumers seemingly less enthusiastic in the name-your-own-price propositions that made the company’s Priceline segment famous and instead highlighting the highly successful Booking.com hotel booking website.
Booking Holdings faces its own growth challenges, as rising competition has led some to fear that hurdles to further revenue gains could prove difficult to overcome. Yet through smart acquisitions, Booking Holdings has been able to answer past competitive threats, and the online travel giant has plenty of financial resources to use if future situations arise that warrant quick strategic action. In the long run, online travel has greater growth potential than entertainment, and that should give the smaller Booking Holdings an edge.