Energy Wishlist: Own the Engineers
Sharing some un-crowded trades as humble candidates for the Energy Wishlist...
We are sitting on the lowest gasoline inventories in the last 4+ years. According to one of my refining aces, last week his firm was expecting a 700,000 bbl draw and got a 5.2 million bbl draw. He shared with me a long list of problems at refineries - big problems - and they all happened in one day! The gas crack spread rallied $4/bbl for May, following the inventory figures the day we spoke, an off the charts huge move.
As Minyans know I am long the refineries, and I expect to be competing with their own buyback programs on the bid if I wanted any more. But I'll share what are more un-crowded trades as my humble candidates on the Energy Wish List and look no further than the word 'problems' from that summary above.
Refiners are paying over-time and around the clock for engineers to fix them. That's after a shift gets done trying to bring them up to environmental standards. That's after a shift gets done trying to squeeze more capacity out of the existing refineries.
My good pal, the Bus or Guy Adami, is one of the few commentators to finally pull back the covers on this idea just the other night when he mentioned Jacobs Engineering (JEC), referring to its work outside this space entirely. That, and an inventory of pink shirts, is what makes a TV superstar.
These stocks are being priced as if the energy story is still at risk of collapsing. You can find backlogged orders larger than market caps. Talk to the engineers doing the work and they don't even believe it will last themselves. I am comfortably on the other side of that trade.
How much work do we still have to do? One of my pals was recently working on a refinery that was originally a kerosene plant, built in the late 1800's.
How long will it last? Entire engineering departments at leading universities were closed over the last decade because of lack of interest. We have just about lost an entire generation of engineers. The "Chicks Dig the Slide Rule" movement on campuses just never really caught on. I have several friends willing to testify to that affect. We have such a shortage of engineers that my partner went to visit some (as told in this article) where he saw an entire hiring firm brought on campus just to cold-call other countries all day long to find new hires.
While everybody looks at the refiners, I suggest looking at their invoices which are gladly being paid, in size. The return address reads Engineering Firms.
Here is a list to chew through, not limited to refining projects. All data comes from our friends at Thomson Financial. Each figure/comparison is in relation to this group of seven engineering stocks alone. I simply scraped the top and bottom of a few variables among these peers when put side by side for highlights and lowlights. There are other worthy companies for consideration as these are not the only engineering firms. For full disclosure I simply chose the most representative group, in my view, and I have traded in and around several of them.
- Washington Group (WNG): Exposure to power generation including nuclear, environmental remediation, and mining industries. The smallest of the group at $2 billion in market cap. The lowest average top-line growth over the past three years at 11%/yr. The fewest number of analysts follow the stock, only four.
- Fluor (FLR): Exposure to oil and gas projects, chemical industry, and power generation including coal industries. The largest of the group at $8 billion in market cap, and the most richly valued on earnings at 34 times the last four quarters. The lowest EBIDTA margins at 3.5%. The most analysts follow the stock, at 15. Insider selling over buying at the highest ratio.
- Jacobs (JEC): Exposure to oil and gas exploration and refining, biotechnology, and paper industries. Highest top-line average revenue growth over the past three years at 23%/yr.
- Chicago Bridge & Iron (CBI): Exposure to oil and gas, chemical, power, water, and mining industries. The biggest winner year-to-date up 20% and over the last 12 months, up 35% (after struggling with accounting issues). The cheapest valuation of 17 times the last four quarters' earnings.
- Foster Wheeler (FWLT): Exposure to oil and gas, power, chemicals and alternative fuel including liquefied natural gas industries. The highest EBIDTA margins at 8.8%. The most debt at 74% of market cap. Insider buying over selling at the highest ratio.
- Shaw Group (SGR): Exposure to power, piping, and environmental industries. The highest average earnings growth rate of the past three years at +40%/yr. The worst performer over the past 12 months, down 9%.
- KBR (KBR): Spin-off from Halliburton (HAL) in 2006. The biggest loser for the year, down 21%, yet most recently reported one of the two largest upside earnings surprises (55% higher than expected) in the group. Sports 0% long-term debt on its balance sheet.
Collectively you could buy the entire group of seven for just under $29 billion. Exxon Mobil (XOM) currently fetches about $440 billion by itself which points to another set of comparisons I think you may be well served to make.
I grabbed seven of the largest and most well followed traditional energy stocks using market caps and analyst coverage alone to build a list that also covers most of the entire sector's businesses.
The stocks in this group average over $111 billion in market cap and are covered by an average of 28 Wall Street analysts per stock.
On an equally weighted basis, these seven energy stocks are up an average of 5% each over the past 12 months. The group of seven engineers are up an average of 12% over the last 12 months while only nine Wall Street analysts are watching this dramatic out-performance, which I believe is a key ingredient to this trade, not a coincident. From my perch, owning engineers does not appear to be a crowded idea on Wall Street despite the fact they are fixing the problems Wall Street is most worried about!
Another way to measure how crowded a trade is would be determining who owns the shares. I like to know how many mutual funds own a stock and in which direction that number is moving. While telling me nothing about the merits of a stock, I look at the number of money managers who own the stock according to recent filings and data from various sources that I enjoy cobbling together. You could easily point to the lack of intelligence it takes to do this, heck I'll do it for you, but a well underlined entry to my trading diary reads: "Would you rather be right, or make money?"
My firm's trading records make it quite clear that our biggest winners had only one thing in common when we whittled down all the variables – they were very lightly owned among major institutions when we started buying.
The seven traditional energy stocks mentioned above are held, on average, by more than 2,100 mutual funds each while the seven engineering firms were tucked away in only 350 funds, on average. If you agree with me that buying and selling pressure ultimately controls the next movement in any stock, not earnings or valuations, then you must ask yourself – even about your very best ideas that you're convinced will work (like we need to be doing in energy)– once everybody is aboard a great idea, who is left to push the boat?
I think the engineers may have the most open seats on their boats in or around the energy sector, currently being kept warm by plenty of outgoing invoices.
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