Three Stocks to Watch for the Week of September 12th

The major indices rose last week, snapping a three-week losing streak following more dovish comments from Fed officials than markets expected. Federal Reserve Vice Chair Lael Brainard stated that she still believed the economy could avoid a recession as the Fed raised rates. For the week, the Dow closed 2.7% higher, the S&P 500 added 3.7%, while the Nasdaq gained over 4%.

The week ahead will be an eventful one on the economic data front. A Consumer Price Index report scheduled for Tuesday will show whether the recent moderation in inflation extended into August. In July, inflation rose at an annual rate of 8.5%, marking a slowdown from the previous month’s 9.1%, mainly due to falling gas prices. Additionally, Friday’s preliminary September reading of the Michigan Consumer Sentiment Index (MCSI) will provide a critical update on consumer confidence.  

Our team has three recommendations this week, including a utilities leader that rewards investors with a sizeable and dependable payout and an energy stock that seems like a bargain against peers.  

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Leading manufacturer of small satellites, Terran Orbital (LLAP) provides end-to-end satellite solutions by combining satellite design, production, launch planning, mission operations, and in-orbit support to meet the needs of the most demanding military, civil, and commercial customers.  

Serving the United States and Allied aerospace and defense industries primarily, Terran was recently awarded Mission of the Year by the American Institute of Aeronautics and Astronautics Small Spacecraft Technical Committee for its Cislunar Autonomous Positioning System Technology Operations and Navigation Experiment, otherwise known as CAPSTONE, in cooperation with NASA and Advanced Space. The groundbreaking lunar orbiter is set to complete its mission at an unprecedented low cost in record time.

The company is both building spacecraft for other customers and working on its system of 96 Earth imagery satellites, which co-founder and CEO Marc Bell  Bell described as “Earth observation 3.0.” The satellites combine two types of imagery collection technology, optical and synthetic aperture radar, Bell said so that Terran can “overlay the data” and provide more in-depth analysis to customers.

Terran reported record-breaking Q2 revenue results, and management expects to build on that solid momentum in the back half of the year. The company generated revenue of $21.4 million in the second quarter, indicating a 127% year-over-year increase. Net loss was also down at $32.3 million, nearly half that of the $71.4 million reported for the previous quarter.   

Terran’s solid prospects and existing orders make for reliable indicators of where the company is headed. As of June 30th, the company had built its pipeline to more than 140 opportunities, representing over $16 billion in value. Its backlog is up 200% over the past six months to a record $224.1 million.  

Of the six analysts offering recommendations for LLAP, all six rate the stock a Buy. A median price target of $10 represents an increase of 127% from its current price. Stifel analyst Erik Rasmussen recently initiated coverage of LLAP with a Buy rating and an $8 price target. He views the company’s leadership in the design and manufacture of smallsats and its technical capabilities as critical differentiators. He believes Terran is on the cusp of a tremendous and growing opportunity in the small satellite market.

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Morningstar analysts say higher consumer spending, supply constraints, and higher energy prices driving inflation should be short-lived. “If interest rates can hit a sweet spot that tames inflation without alienating income investors, utilities are well positioned to produce another year of 7% to 9% total returns, given attractive dividend yields and infrastructure growth,” they say.  

Utilities giant and prospective 2022 winner Exelon (EXC) has a market cap of $45.5 billion and is one of the top five publicly traded utility stocks in the U.S. 

EXC touches roughly 10 million customers across the U.S. through an extensive network of power plants ranging from fossil fuel facilities to hydroelectric dams. The unmatched scale of Exelon’s reach provides a solid foundation for EXC shares. In fact, shares are up more than 41% over the past twelve months to outperform the broader S&P, which is up 13% for the same period. 

EXC boasts a healthy 2.9% dividend yield backed up by a conservative payout ratio in the 65-75% range over the past five years. The stock also garners a Buy rating from the Wall Street pros offering recommendations.

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Oil and gas prices spiked earlier in the year due to Russia’s invasion of Ukraine and could spike again into 2023 due to the energy crisis in Europe this winter and reserve concerns. Energy stocks have dramatically outperformed the broader market, as evidenced by the 79.9% gain over the past six months for the Energy Select Sector SPDR ETF (XLE).

The International Energy Agency (IEA) expects global energy demand to increase by more than 30% by 2035. APA Corp. (APA) is one of the few oil and gas exploration and production companies offering exposure to the meteoric rise in gas prices.  

In the second quarter, APA saw $3.05 billion in total revenue representing 71.3% year-over-year growth with strength across oil, natural gas, and natural gas liquids (NGLs). Adjusted earnings grew 205% from the prior-year quarter to $811 million. Adjusted EPS increased 239% from the prior year period to $2.37. Analysts expect Q3 revenue to be $2.63 billion, indicating a 59.2% year-over-year increase. APA’s earnings are expected to increase 145% year-over-year to $2.40.  

MKM Partners analyst Leo Mariani recently raised the firm’s price target on APA from $45 to $50, citing international natural gas prices having reached all-time record levels driven by the cut-off of most Russian gas into Europe as well as outages and maintenance on a few major global LNG facilities around the world.  

The 29 analysts offering recommendations mostly agree with Mariani. The stock garners a Buy rating and a $54 median price target, representing a 48% increase from the current price. With a low TTM price-to-earnings ratio of 4.5, APA seems like a bargain against peers.   

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