Sweet 16 Update - Nov 12

[dan_s]

The Sweet 16 moved 2.36% higher for the week ending November 11 and it is now up 36.98% year-to-date. The S&P 500 Index also had a good week and it is now up 5.90% YTD. The initial market reaction to the Trump victory was down on Tuesday night, but the markets moved higher the next day. The initial reaction in the Clinton household was "Oh crap, we better get a pardon from Obama."

Personally, I think presidents can only have a minor impact on the economy and the stock market. However, with control of all three branches of the government maybe the GOP can get some good things for business passed. Nothing is going to happen quickly.

Lower corporate tax rates and fewer regulations would be helpful. If Trump rips up the Iranian Nuke Deal (highly unlikely) it would have a significant impact on the oil markets. What OPEC announces on November 30th is more important.

I have updated my forecast/valuation models for each company based on their Q3 results and new guidance. The Sweet 16 Spreadsheet shows my valuation for each company compared to First Call's current price target as of Friday, November 11. Keep in mind that it does take a few weeks after a company announces quarterly results before analysts submit new valuations to First Call. First Call is a service of Reuters. Their price targets are an average of all the price targets submitted to Reuters by Wall Street analysts. BTW the range of price targets for most companies is quite wide.

I have followed and modeled all of these companies for many years. I have a HIGH level of confidence in my forecast models for this group.

Antero Resources (AR) is trading at the largest discount to my valuation ($47.00). Antero has more than 100% of their forecast natural gas production for 2017 hedged at $3.63/MMBtu, so I have a VERY HIGH level of confidence in my forecast model for this "gasser". Antero's realized natural gas prices for the first three quarter of this year were over $4.30/mcf.

Gulfport Energy (GPOR) and Range Resources (RRC) are also trading at deep discounts to my valuations. Both of these "gassers" have strong production and proven reserve growth locked in. My valuations assume NYMEX gas averages $3.00/MMBtu in 2017 and I make adjustments for each companies' hedges and regional price differentials. Gas in storage is high for this time of year, but a normal winter should bring the U.S. gas market back into balance. One strong "Polar Vortex" should do it.

Devon Energy (DVN) looks very attractive to me at the current share price. This large-cap has successfully transitioned to a company focused primarily on STACK where they continue to report strong well results. For those of you investing for high yield, take a look at EnLink Midstream Partners, LP (ENLK). EnLink is a publicly traded midstream MLP that is controlled by Devon. It will benefit from Devon's aggressive development program in STACK.

Wall Street is head over heels in love with the Permian Basin, but well results in SCOOP/STACK are just as strong. DVN, CLR, NFX and XEC have large positions in Central Oklahoma.

Pure plays on the Permian Basin are: CXO, FANG, PE, PXD and RSPP. Others with large core areas in the Permian: XEC, DVN, EOG, NBL, PDCE and SM.

I did lower my valuations of SM Energy (SM) and Cimarex Energy (XEC) a bit, but they are still trading at discounts to my valuations and First Call's price targets. SM Energy has a large portion of their Eagle Ford leasehold in a joint venture operated by Anadarko that is for sale. I good price for the package could draw a lot of attention to SM.

Over the next two weeks we will be sending out updated profiles on all of the Sweet 16. An updated profile on AR has already been sent out.

[dan_s]

The companies in our Small-Cap Growth Portfolio are HIGH RISK when compared to the Sweet 16. Their size limits their access to capital and they have more exposure to operational difficulties and/or a prolonged period of low commodity prices.

I do not post this to frighten you, but to remind you that there is more risk when putting too many eggs in one basket.