Sweet 16 Update - May 8

[dan_s]

Our Sweet 16 Growth Portfolio gained 17.45% during the week ending May 7 and is now up 82.01% YTD. The S&P 500 Index is up 12.69% YTD.

All of the companies have now reported Q1 results that met or beat my forecasts, primarily because of much higher natural gas and NGL prices than I had used in my models. Several companies were able to sell some gas at very high prices in the spot market that were caused by Winter Storm Uri. NGL prices are much higher as a results of a significant drop in propane inventories. It will be difficult (if not impossible) to rebuild U.S. propane inventories to a safe level before the next winter heating season; this should support NGL prices all year. Higher NGL prices also push dry gas prices higher.

Companies that have the most exposure to higher NGL prices are AR, EQT, RRC, DVN, XEC, PDCE and OVV.

Q1 results and fresh company guidance have increased the confidence that I have in my Sweet 16 forecast models. All of these companies are now generating solid free cash flow from operations and 7 of them are paying dividends (XEC, CLR, DVN, EOG, FANG, OVV and PXD).

All 16 forecast/valuation models have been updated on the EPG website. You can find them under the Sweet 16 Tab after you log on. They are only available to EPG members so you must log in to see them.

The only stock that was down for the week was Laredo Petroleum (LPI) that sold off big on Thursday, but started a comeback on Friday. I see nothing that justifies the big selloff. LPI has a small number of shares outstanding, so one large seller can trigger a stop loss selloff that feeds off of itself. Since the stock price is up 343% since April 2020, my guess is that shareholders have been tightening up their stop loss orders.

Laredo has a lot of production hedged and they reported a non-cash mark-to-market loss on those hedges of $113.2 million, causing "GAAP Net Income" to be a loss of $75.4 million. Laredo's "Adjusted Net Income" actually beat my forecast and the company is generating solid free cash flow from operations. In my opinion, Thursday's selloff was based on FEAR. Based on the company's guidance, Laredo is on-track to generate more than $425 million in operating cash flow this year, which compares to their CapEx budget of $360 million. Their production is expected to increase by more than 6% from Q1 to Q2 to ~84,000 Boepd.

I will spend some time discussing the Sweet 16 results on today's podcast.