market folly

I've said before that I typically don't place too much weight on analyst calls, but today numerous analyst calls caught my eye and I wanted to post them up.

Firstly, in the oil arena, there were a few active analysts who revealed a myriad of opinions. Firstly, Morgan Stanley upgraded Transocean (RIG) to Overweight, citing that they think the credit crunch gives them an advantage, as smaller drillers will struggle to finance projects. This makes sense to me just given the fact that RIG is a behemoth in the drilling space now. But, I wouldn't cite it as one of the main reasons they will outperform. They've got tons of rigs already and have other ones scheduled to come off construction in coming years. RIG is easily one of my favorite long-term plays due to their dominant market positioning, their ability to raise dayrates fairly consistently, and the armada of rigs that they will have coming online in the near future.

Back in September, RIG was added to Goldman Sachs' Conviction Buy List. Shares have been demolished as of late, offering a possible opportunity for those with a long-term bullish thesis on oil and deepwater drilling. Boone Pickens' BP Capital had RIG as their 2nd largest holding as of last quarter. RIG has been trampled partly due to the decrease in the price of oil and partly due to forced selling by various hedge fund and mutual fund names. Overall, I figure RIG is a solid buy as long as oil remains above $70 a barrel, which gives them enough room to still maintain or increase the high dayrates they charge. They are seeing operating margins of 46% and return on equity of 38%. Their valuation is absurdly cheap, but I won't dwell on that given the fact that in this market, valuation got thrown out the window a long time ago. And, the cheap can always become even cheaper. But, the fact is that this company has solid fundamentals going forward long-term. They are seeing quarterly revenue growth of 116% and quarterly earnings growth of 101% on a year over year basis. They do have a lot of debt, but their strong cashflow generation should alleviate any major stress from that.

There was also a bevy of other oil related calls today by an analyst from Deutsche Bank. They downgraded tons of oil names, citing a worldwide recession in 2009. They have cut oil price forecasts to $60 per barrel in '09 and $58 per barrel in '10. They wrote, "This view implies that the marginal oil company will make zero profit for the next two years. It implies leveraged oil companies may go bankrupt. It implies GDP-sensitive (ie refiners/chemicals) companies will suffer. Ultimately, it strongly suggests upheaval in oil-revenue dependent states." While anything is possible considering the grave state of numerous economies worldwide, I still do not think a worldwide recession is in the cards. This will have to be continually evaluated as we receive new data each quarter, but I think this is a slightly harsh call. Should a worldwide recession emerge though, their call makes sense in that the leveraged companies will find it increasingly difficult. They have downgraded a myriad of names, including Marathon (MRO), Conoco Phillips (COP), Suncor (SU), and Hess (HES) among others. Its interesting to now note that they only have "buys" on two oil names: Occidental (OXY) and Canadian Natural Resources (CNQ). OXY is a name that has seen vast hedge fund ownership, including by that of Atticus Capital, Caxton Associates, Tudor Investment Corp, and BP Capital, among many others.

Lastly, Goldman Sachs was out making changes again to its Conviction Buy List. They added Waste Management (WMI) to the list, and removed Allied Waste (AW) from the list. However, they still maintain a 'buy' rating on AW (just not a 'conviction buy'). Additionally, they also added Marsh & McLennan (MMC) and Applied Materials (AMAT) to their Conviction Buy List.