With Jerome Powell set to talk to the press next week, all investor eyes will be glued on the chairman to see what is coming next for the US monetary policy. Should he feel inflation is here to stay, we're going to see a massive rotation into stocks like this one below. If he stands firm and believes it is still transitory, we anticipate some volatility in both directions. Either way, his comments on inflation and any changes to the interest rate plan will cause some waves in the markets. If you're nervous about any of these topics, the following stock is designed for the investor hedging downside while also looking for cash flow and protection from inflation or any early rise in rates.
Background:
If you haven't been following the markets recently or aren't aware of what we're referring to -> here is some context:
Right now the Chairman of the Federal Reserve of the US has been saying inflation will pass and is short term, while the rest of the market is taking his statements with a massive grain of salt.
If you're wondering why his thoughts even matter, it is because he and the The Fed supervise the nation's largest banks, conduct monetary policy, and provide financial services to the U.S. government. In essence, they promote the stability of the financial system. So when Mr. Powell speaks, others often take notes and listen.
Right now it is effectively a tug of war, with him on one side and many economists and investors on the other. Should he flip his stance (e.g. let go of the rope) we may see a massive toppling over of the market. This would lead to many fully believing inflation is here to stay. Add in the fact that the delta variant may very well put us back into another shutdown and the fear meter could be spiking very high quite soon.
Should all these events take place, then you better believe having defense stocks in your portfolio is only going to help hedge yourself against any downside! Caught up now? Great! Let's dive into the stock that will help us achieve these goals.
The stock is: Schlumberger
Schlumberger is an oilfield services company. They supply the industry’s most comprehensive range of products and services, from exploration through production, and integrated pore-to-pipeline solutions that optimize hydrocarbon recovery to deliver reservoir performance sustainably.
Yes what a mouthful! Long story short, Schlumberger is a giant in their industry and has a major footprint in the future of energy. And right now energy is an amazing way to hedge downside, protect against inflation all while being able to collect a dividend payment.
Company Analysis:
So the macro here makes sense. Schlumberger is a great way to hedge any changes to inflation expectations. But why does the company itself, warrant our recommendation? Let's break it down:
- Their margins are as high as they've ever been since 2016. We also project them to keep growing. If you've been following us for awhile you know how important margins are to our investing strategy. High, expanding margins are one of the telltale signs of a strong business. This means they retain a lot of cash for everything that they sell. If they're able to keep up this margin expansion, with revenue growth being relatively low, we think they have a strong chance at increasing EPS more than expected! Should this occur, the stock would respond with a positive bump upwards.
- They absolutely crushed all of their earnings expectations. They did this by having revenues of $5.6B vs $5.5B, EBITDA of $1.2B vs. $1.15B, EBIT of $669M vs cons: $598M & EPS of $0.30 vs. $0.26. Such outperformance like this, signals more growth to come!
- The valuation makes sense to buy in at current levels. At its current price, the valuation suggest that forecasted growth is close to 0%, whereas the consensus has it higher. Additionally when looking at their historicals, we see them trading a discount to their relative valuation. Typically this happens if people expect downside but everyone thus far has signaled a positive outlook. Therefore we see this mis-pricing as an opportunity to add more capital to the mix.
Schlumberger's offshore production facilities
Conclusion:
SLB makes sense for a handful of reasons. If you're nervous about the market, any external headwinds or just want a defensive name in your portfolio, you cannot do much better than SLB. Add in the fact that the stock is growing and is mispriced and you have a company ripe for a step up in valuation. We therefore are initiating an overweight rating and are adding it to our portfolio for diversification purposes!
Price Target: $40
Target Date: 6-8 Months
Rating: Overview
Ticker: SLB