This is a year that has been marred by volatility, with markets rattled by US President Donald Trump’s tweets and a normalising Federal Reserve putting pressure on emerging market assets.
Amid all the noise, 2019 holds promise for some US stocks as risk-appetite remains sturdy fuelled by a 90-day trade-war ceasefire from the world’s two largest economies. But as the US yield curve shows a potential recession in 2019, with three-year and five-year US yields inverted for the first time in 11 years, now might be the time to buy cheap US stocks.
The first to consider is energy company BP plc, which operates through three segments: upstream, downstream, and via its 19.75% stake in Russia’s Rosneft. BP’s exposure to Russia presents a blend of North Sea oil and vast Russian reserves given integrated energy company Rosneft’s engagements in exploration and production of hydrocarbons, as well its 13 refineries in Russia.
BP has recovered from the April 2010 Deepwater Horizon drilling rig explosion off the Gulf of Mexico, which ultimately cost the energy company US $54 billion in economic damages and penalties. Today, BP’s revenue growth is buoyed by the relative crude recovery, strong growth in net income, robust revenue growth, notable earnings-per-share growth, and manageable debt levels.
Strikingly, BP’s revenue growth – at 32.4% – outperformed the industry average of 27%, lifting the energy company’s earnings per share 121.3% year-on-year.
Net operating cash flow was slightly up quarter-on-quarter – by 1.12% to $6.092 million – buoyed by the net income growth which has surpassed both the S&P 500 and the oil, gas and consumable fuels industry. Net income grew by 89.3% year-on-year, to $3.349 million.
Crude demand is looking strong despite pressure from environmentalists for cleaner energy. Longer-term demand is projected to grow at about 1.8% per year, meaning it is expected to grow more than 40% over the next 20 years, with BP well positioned to yield from the global demand.
The bullish tone on trade from the White House, coupled with increased indications that Opec members will agree to cut production at their 6th December meeting in Vienna, is bound to add wind to the energy company’s sail.
In addition, Qatar’s decision to withdraw from Opec to focus on its plans to increase natural gas production from 77 million tons per year to 110 million means the market will shed 600 000 barrels daily, ultimately pushing up crude prices. For BP’s natural gas operations however, low prices might present headwinds in the near term driven by oversupply in 2018.
Diversified financial holding company Citigroup operates through two segments: global consumer banking, and institutional clients group. This is one to watch in 2019. It’s one stock many portfolio managers have a buy position on. Citgroup’s stock price has dropped over the year given its relatively low return on equity, but much of this can be offset by its growing profit margins, revenue growth, good cash flow from operations, progress in earnings per share, and rise in net income.
With Citigroup’s quarterly gross profit margin up 43.77% and net profit margin up 18.66% for the quarter, the NYSE C shares are undervalued at US $65.16 (as at December 4, 2018). In addition, net operating cash flow improved 19.44% to US $21.7 million year-on-year while earnings per share surged 22.5% in Q3 2018.
The Trump presidency has presented an opportunity for commercial banks to rebound after his predecessor set in place reforms to protect consumers after the 2007/8 subprime crisis. The reforms designed to reduce systemic risk in the space have eased a little, and banks’ stocks are fair value today.
Citigroup also presents exposure to an array of markets, with operations in North America, Latin America, Asia, Europe, the Middle East and Africa. Uniquely, however, Citigroup has a two-pronged model which addresses retail and wholesale – presenting a hedge on retail with fixed income, equity, foreign exchange, prime brokerage and derivative options.