The market doesn't always get things right. Sometimes it's way too pessimistic about a company's prospects and sells its stock off for no good reason. Other times, it takes a stock to an extreme that just defies logic. These scenarios certainly seem to be the case for Starbucks (NASDAQ:SBUX), Fiat Chrysler Automobiles (NYSE:FCAU), and Occidental Petroleum (NYSE:OXY), all of which have us scratching our heads because the market seems to have taken them in the wrong directions.
Caffeinate your portfolio
Demitri Kalogeropoulos (Starbucks): Starbucks shareholders have been forced to watch the recent market rally from the sidelines. The stock fell 6% over the last 12 months compared to a 15% jump for the S&P 500.
That pessimism is overblown.
Yes, the coffee titan's business is showing signs of stress. Customer traffic was flat last quarter, which drove a slowdown in revenue growth. Executives described a "challenging environment for restaurant retailers" as they projected sales gains of 8%-10% this year, or a tad below the 10% annual boost that anchors their long-term plan. Other reasons for investors to worry include rising labor costs in the U.S. and CEO Howard Schultz's transition away from the leadership role.
But Starbucks' best days are ahead: In fact, the company sees room to boost its footprint by 50% over the next five years. A huge chunk of those gains will come in China, where its latest class of store openings has been its most profitable. There's plenty of room to grow in the U.S., too, through initiatives like online ordering, drive-through additions, and smaller-footprint stores. Profit margins might even improve from their record highs, thanks to a booming retail-channel development business.
Given the many pathways to market-beating sales and profit gains ahead, this year's stock slump looks like an opportunity for patient investors to snap up one of the strongest restaurant brands in the world.
Was this a Trump rally?
Daniel Miller (Fiat Chrysler Automobiles): Since President Donald Trump won the election in November, one stock that has certainly benefited has been Fiat Chrysler Automobiles: It's stock price has moved almost 55% higher. It's no coincidence, as many see Trump as pro-business, but it goes deeper than that for FCA.
FCA is still in the process of turning its business around. It remains years behind its Detroit counterparts, Ford and GM, which have largely completed their turnarounds and are marching toward a future of autonomous vehicles and smart-mobility projects. FCA is also far more debt-burdened, carrying $25.68 billion in debt compared to Ford's $15.9 billion and General Motors' $10.8 billion as of the end of 2016.
Because FCA has to focus on these two matters, the fact that Trump is reopening the EPA's current emissions standards for review is huge. If Trump and his team relax those standards, it will significantly reduce the pressure on FCA to research and develop expensive technology to drastically improve fuel economy for the brands that keep its lights on: Jeep and Ram trucks.
While this would certainly be a near-term win for FCA and its investors, Wall Street's pushing the stock up so drastically since the election is a bad move in the long term. FCA is lagging competitors, including both of Chrysler's old Detroit rivals, in smart-mobility projects that will drive incremental revenue streams. It's also lagging in vehicle electrification and driverless-vehicle technology.
FCA is light-years ahead of where it was during the Great Recession, and it's done a solid job of taking steps in the right direction. But it still faces the extremely difficult task of catching competitors while paying down debt, and Trump's potentially relaxing EPA emissions shouldn't equal a 55% jump in stock price over the past few months -- Wall Street has this one wrong.
The oil stock the market tossed aside
Matt DiLallo (Occidental Petroleum): While crude oil prices have slumped a bit in recent weeks, oil is still up more than 15% over the past year. Typically, that rising tide would lift all boats. However, for some reason, the market forgot to take Occidental Petroleum along for the ride, as its stock is down nearly 10% over that same time frame. That's despite the facts that the company has a rock-solid balance sheet, clearly visible cash flow improvements on the horizon, and a prime position in the red-hot Permian Basin to fuel low-cost growth in the current environment.
Occidental Petroleum has one of the strongest balance sheets in the industry, with an "A" credit rating thanks to relatively low levels of debt and more than $2 billion in cash. Furthermore, the company's cash flow should improve by about $1 billion versus last year. Driving that increase are the recent completion of its chemicals expansion, the ramp-up of several midstream projects, and a combination of improving production and lower costs in the Middle East.
However, the real story at Occidental is its industry-leading Permian resources position. The company estimates that it controls 2,500 future drilling locations that have break-even levels below $50 a barrel, with as many as 11,650 total locations that are profitable at a higher oil price. That said, its low-cost wells alone are enough to fuel 30% compound annual production growth in the region over the next several years at current prices, which could boost the company's overall output by 5% to 8% per year. Given how much the market loves the Permian these days, it's surprising to see Occidental being overlooked.