Analysts Spot a Bottom in These 2 Stocks

Kenny Rogers sang, in “The Gambler,” “You got to know when to hold 'em, know when to fold 'em" -- a poker reference that has merged into popular culture. But how many know another line of the same song? "…Every hand’s a winner/And every hand’s a loser…"

The meaning, of course, is clear: a player must understand the lay of the game, the intentions of his opponents, and the odds of improving his hand – only then can he decide whether to draw or bow out. And a skilled player can always find a path to win, no matter what cards he starts with.

The stock markets – a field of endeavor far more complex than any poker table – offer investors a similar mix of risk, calculation, and opportunity. Most stocks can be a winning part of a portfolio, depending on the investor’s overall strategy. Whether the stock moves up or down is sometimes less important than the investment strategy behind the choice.

This may all sound abstruse, so let’s bring it down to ground level. ‘Buy low and sell high’ is accepted as an aphorism. The trick is knowing how to tell where a stock’s bottom is.

Two analysts in the TipRanks database have tapped two stocks that all fit a profile – a depressed share price and a high upside potential. Is this the combination that offers investors to buy low – and make every hand a winner? Let's take a closer look.

Viper Energy Partners (VNOM)

Operating in the Permian Basin of Texas, Viper Energy holds extensive exploration and drilling rights in the Midland Formation. The company doesn’t extract the oil directly; rather, Viper owns the properties and manages the operations, with drilling conducted by third parties. Viper’s holdings are both extensive and potentially lucrative – the company is estimated to control nearly 10 billion barrels of recoverable oil and equivalent products.

The coronavirus crisis pushed down the price of oil on world markets, and that has impacted profits upstream. Through 1H20, Viper’s revenues and earnings have both been on a downward trend. The top line fell to $32.5 million in Q2, with EPS coming in at a net loss of 4 cents. It’s important to note, however, that VNOM’s EPS beat the forecasts in both Q1 and Q2.

The share price has fallen along, too. The stock is down 70% year-to-date, and has been trading flat through September and October.

Covering this stock for Scotiabank, analyst Philip Stuart sees a clear path forward Viper Energy. Citing the company’s solid Q3 production numbers, Stuart writes, “[VNOM] was able to grow oil production ~10% q/ q and beat consensus expectations for 3Q20 by ~8%. We are quite encouraged by the VNOM production update and think the outlook for 4Q20 should be higher than 3Q20 based on previous management commentary on the trajectory of production for 2H20. We would expect VNOM to outperform the peer group…”

In line with this outlook, Stuart rates the stock an Outperform (i.e. Buy) and sets a $13 price target. His target implies a robust upside of 82% for the coming year.

Overall, VNOM shares hold a Moderate Buy rating from the analyst consensus, based on 8 reviews breaking down to 5 Buys and 3 Holds. The stock is selling for $7.15 and the average price target of $12.71 is not far off Stuart’s, suggesting a 78% one-year upside. (See VNOM stock analysis on TipRanks)

Arch Coal, Inc. (ARCH)

Oil and gas may get the headlines, but they are not the only fossil fuels. Coal, which originally powered the industrial revolution, is found in huge abundance in the Appalachian and Rocky Mountain regions, where Arch Coal is a major producer. The company is diversified, producing mainly metallurgical products for the steel market, but remains a major supplier of metallurgical coal. Arch also produces coal for the power generation markets – coal is the still the major fuel for electrical plants in the US and globally – and has mines in four states.

Arch saw drops in revenue and earnings before the coronavirus hit, and those drops were exacerbated by the crisis. By 1Q20, the company was reporting a $1.67 per share net loss, which worsened to $3.26 in Q2. The recent Q3 report showed the net operating loss per share ameliorating to $1.87, but that was worse than the forecasts had estimated. At the top line, quarterly revenues have fallen from $550 million at the end of 4Q19 to 3Q20’s $382 million.

Headwinds here include reduced demand due to the economic shutdowns during the corona crisis, but also worries about the political situation. Democratic candidate Joe Biden leads in the Presidential polling – and his party’s policy includes reducing fossil fuel use and dependence, especially in the coal industry.

With all of that, it should not come as a surprise that ARCH shares are down nearly 50% this year. Aside from a few brief peaks, the stock has remained below $40 per share since early March.

Lucas Pipes, however, from B. Riley Financial, sees the company setting up a solid strategy for growth.

“ARCH is finalizing a strategy that could lead to a 50% decrease in PRB production over the course of the next 2 to 3 years. This, as well as other cost-saving initiatives, aims to improve PRB margins and allow ARCH to expedite the paydown of its closure-related obligations [...] ARCH reported an impressive 2021 contract book, which we believe went underappreciated by investors.”

Pipes rates the stock a Buy, and gives it a price target of $68. At current levels, that implies an upside of 87% for the coming 12 months. (To watch Pipes’ track record, click here)

Overall, with 3 recent reviews, including 2 Buys and 1 Hold, Arch Coal gets a Moderate Buy rating from the analyst consensus. This company’s shares are selling for $36.44, while the average price target of $53 indicates it has room for a 45% upside. (See ARCH stock analysis on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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