"Most of the reason that banks are underearning relative to their historical norms ... is economic and not regulatory," says Richard Pzena (NYSE:PZN), who remains bullish on the TBTFs. Low interest rates, weak trading, and "government persecution" are the three factors, and - should these normalize - earnings could nearly double at Bank of America (NYSE:BAC) and Citigroup (NYSE:C), though JPMorgan's (NYSE:JPM) boost would be more modest. Goldman Sachs (NYSE:GS) is another favorite.
Another cheap sector is energy, says Pzena, and based on relative valuation against the broader market - whether price-to-book or price-to-earnings - the major integrated oil companies are selling near all-time lows.
What the market is missing, says Pzena, is the nature of oil investment. The old days saw capital spending one year, and boosted volume the next. Projects nowadays are far larger and require several years of spending before returns roll in. "We think those big new projects are going to perform and produce decent returns." HIs favorites: BP, RDS.A, RDS.B, XOM, TOT.
Ethan Bellamy, an MLP analyst with Robert W. Baird, estimates investors who acquired units during 1992-2000 could owe $24.04-$25.22 per unit, investors who acquired units during 2001-10 could owe $10.78-$23.72, and investors who got their units during 2011-13 could owe from $4.62-$7.13.
What's more, there's very little unitholders can do about it; while "death is the best tax planning for MLPs," the coming reorganization counts as a taxable sale, with KMP investors slated to receive $10.77 in cash and 2.1931 shares of the new firm for each unit they currently hold.
Barclays regards Russian oil and gas companies as too risky for now, with no reason to assume any resolution to the Ukrainian crisis in the near term, but it sees Latin American energy stocks offering a more appealing set of risk/rewards.
Of the firm's two Overweight ratings among emerging market energy stocks, the firm says Pacific Rubiales (OTCPK:PEGFF) offers a combination of relatively small size, expertise in heavy oil and is positioned to take part in Mexico's energy reform.
The firm also likes Petrobras (NYSE:PBR), expecting near- to medium-term positive momentum following the Brazilian presidential election in October, but it remains concerned about production and reserve replacement at Ecopetrol (NYSE:EC).
In South Africa, Barclays believes Sasol (NYSE:SSL) is entering a period of sustainable positive momentum, with a number of potential near- to medium-term catalysts which could boost valuation.
J.P. Morgan upgrades AGCO (AGCO +1%) shares to Neutral from Underweight, as downside risks are priced into the stock at current levels, but remains bearish on rival farm manufacturer Deere (DE -0.3%).
Because of its weaker market share in the row crop sector, AGCO did not participate in rolling programs or multiple unit discount programs in recent years, and the GSI business is benefiting from the lack of grain storage capacity as well as the recovery in protein sector fundamentals; the firm thinks the combination should result in AGCO's earnings being roughly flat in 2015, outperforming peers.
JPM remains Underweight on DE as it awaits a trough in demand, which may not occur until FY 2016.
Take-Two (TTWO +4.1%) president Karl Slatoff says his company is weighing the pros and cons of bringing Grand Theft Auto to the big screen. He adds Take-Two doesn't think a weak box office showing would hurt the GTA game franchise.
Dan Houser, the co-founder of GTA developer Rockstar Games, also appears open to doing a GTA movie. However, he insists Rockstar would want to make the film on its own.
Benchmark's Mike Hickey thinks a GTA film makes sense, and that it could compel Activision (ATVI +0.3%), rumored to be hatching plans for its own movie studio, to acquire Take-Two.
Hickey calls an Activision/Take-Two deal a "no-brainer," given Take-Two's developer talent, IP, and low valuation. He notes Activision can lower its business volatility by staggering Rockstar, Bungie, and Blizzard releases, and that Take-Two could help offset World of Warcraft's ongoing decline and Skylanders competition from Disney.
"Sand is the new gold," as share prices surge for U.S. companies which supply sand to energy producers in response to the growing use of fracking to extract oil and natural gas from shale formations.
U.S. Silica (SLCA -0.4%), the biggest producer, has posted 52-week highs in nine of the past 10 trading sessions and has more than doubled YTD; Emerge Energy (EMES +0.9%) and Hi-Crush Partners (HCLP +2.7%) have posted respective YTD gains of 218% and 78%.
Demand for fracking sand next year will be 96% higher than in 2015, with shortages continuing for years, Morgan Stanley analyst Ole Storer predicts in raising his 12-month price target for SLCA to $80.
MarkWest Energy's (MWE +3.2%) target price is raised to $88 from $83 at Wunderlich, which is confident in MWE's ability to achieve double-digit distributions growth after 2015 (Briefing.com).
Wunderlich says wells in the Marcellus and Utica continue to show improvement and have raised the operating outlook for E&P companies in the region; MWE, with its dominating position in the plays and a chain of organic expansion projects in the pipeline, would be a direct beneficiary to the rising production.
The firm also notes that MWE is adding another 400M cf/day of processing and 60M bbl/day of fractionation capacity at its Keystone complex.
BofA/Merrill's Chris Hogg has removed Alcatel-Lucent (ALU +1.5%) from his firm's Europe-1 list. However, Bernstein's Pierre Ferragu has upgraded the telecom equipment vendor to Outperform, and hiked his target to €3.50 ($4.63).
Much like JPMorgan, Ferragu argues Alcatel's carrier IP networking ops (routers/switches) are the company's crown jewel: He estimates the business is worth €2/share ($2.64/share) by itself, assuming a valuation of 2.6x sales (similar to Cisco/Juniper's multiples).
He's less positive on Alcatel's optical and traditional wireline units - he calls the businesses "fundamentally ex-growth and very unattractive for equipment vendors" - and declares its mobile infrastructure unit "has lost the scale necessary to matter globally and is now a passive player outside of North America." But Ferragu nonetheless thinks the mobile ops could be of value to a bigger player such as Nokia.
Alcatel's IP routing sales fell 7% Y/Y in Q2, a reversal from Q1's 16.4% growth. The company insisted tough comps were to blame, and that the market continues to grow. Cisco and Juniper have each reported their carrier router sales have been hurt by soft near-term capex.
Cobalt Energy (CIE +1.9%) discloses it has cut ties with two Angolan companies in which government officials had held concealed stakes, amid the possibility of U.S. charges against it involving the Foreign Corrupt Practices Act.
CIE is developing a major oil find off the coast of Angola, which perennially ranks near the bottom of Transparency International’s corruption perceptions index.
Following several quarters of underperforming peers due to Samsung/Huawei-related weakness, Borges expects Semtech to respectively post 11% and 34% sales and EPS growth in 2015, aided by strong data center, broadcast, and sensor market sales.
She also sees Semtech as a reasonably-priced M&A target as the analog chip industry continues consolidating. Shares recently got a lift from Infineon's $3B purchase of International Rectifier.
Like others, Talpaz considers FireEye's products well-differentiated relative to rival offerings, and praises its technology architecture (involves a multi-vector execution engine for analyzing malware, and a custom hypervisor).
He declares the company is "uniquely qualified to offer risk-averse organizations the full lifecycle of security solutions needed to detect, combat, and ultimately remediate a potential attack."
Talpaz admits FireEye trades at a premium to other security software names, but considers its valuation justified. Shares currently go for 7.7x the midpoint of FireEye's 2014 billings guidance range.
Bombardier has been saying flight tests would resume soon almost since the May engine fire first occurred, but the firm believes the tests are finally just around the corner.
The company's financial performance has hit bottom and should steadily improve over the coming years, the analyst says, adding that its valuation discount relative to peers offers a highly attractive entry point.
Oil services company Tetra Technologies (TTI +4.8%) is upgraded to Outperform from Market Perform with a $16 price target, raised from $14, at Cowen, which cites sufficiently reduced downside risk and material upside to its own sum of the parts valuation.
While results may continue to be choppy, Cowen believes sentiment for TTI has bottomed and further reductions to guidance will not be met with share price declines.
Macquarie's Kevin Smithen has upgraded Level 3 (LVLT +3.5%) to Outperform, and set a $51 target. Merger partner TW Telecom (TWTC +2.7%) is following Level 3 higher.
After talking with management, Smithen thinks Level 3 "has set conservative cost-savings targets" for the merger - the company previously forecast $240M/year in savings. He also considers TW easier to integrate than past acquisitions such as Global Crossing, given its lack of international assets and the fact the company isn't a roll-up of various properties.
He admits there's still "a decent risk" of an integration misstep, but also believes "the risk of not owning [Level 3] if the company executes well is too great."
Teekay LNG Partners (TGP +0.5%) is upgraded to Accumulate from Neutral with a $47 price target at Global Hunter, which believes TGP's recent underperformance coupled with improving visibility to longer-term distribution growth provides investors an attractive total return opportunity.
The firm thinks TGP's recent LNG project announcements are ~10% accretive for the LP unitholders while additional upside could come from new LNG charter announcements for U.S.-based LNG projects and potential ethane shipping contracts through its Exmar joint venture.
Mobileye (MBLY +5.7%) has received 7 bullish ratings from IPO underwriters to go with 2 neutral ones.
Morgan Stanley (Overweight) forecasts a hockey stick-like adoption curve for advanced driver assistance systems (ADAS), aided by U.S./EU safety mandates. "We see 50% of new cars sold globally having some form of ADAS/autonomous system by 2022, rising to 70% by 2028 vs. 2% today."
The firm also views Mobileye's vision algorithm as a key enabler for self-driving cars, and notes the company has an ~80% vision system share.
"The story of Mobileye is one of technological disruption vs. traditional forward-facing ADAS sensors like radars, LIDAR and stereo cameras," says Citi (Buy). Citi notes Mobileye's EyeQ SoC "made it possible for lower-cost/weight monocular cameras to perform ADAS functions better and cheaper than competing sensors," and sees the company's next-gen tri-focal sensor extending its technology lead.
Baird (Neutral) is more cautious, citing concerns about valuation (previous) and "overly aggressive expectations." Its 2014 and 2015 EPS estimates are respectively at $0.18 and $0.39.
WPX Energy (WPX +2.5%) is upgraded to Sector Outperform from Sector Perform with a $32 price target, up from $25, at Howard Weil, which says WPX continues its turnaround story with outstanding Q2 results.
Q2 was the first quarter directed by new CEO Rick Muncrief, and the outlook is already much improved; oil production was ahead of estimates, costs are declining, Gallup results are improving, and the more simplified company is heading in the right direction, Weil says.