There's always a reason stocks trade near year-long lows, which should be considered before buying them. That said, there's a good case for buying both companies discussed here. Devon Energy (DVN 0.19%) is a great option for income-seeking investors looking for some exposure to energy. Meanwhile, Aehr Test Systems (AEHR 1.50%) is an option for enterprising investors looking for a recovery play in 2024.
Devon Energy for dividend investors
There's no secret as to why Devon Energy has declined recently. As an oil and gas exploration and production company, its fortunes are ultimately tied to energy prices. Unlike integrated majors like Chevron, Devon doesn't have downstream operations that provide some insulation from a falling oil price. Unfortunately, the price of oil has fallen from over $93 a barrel in late September to around $73.40 at the time of this writing.
However, I think there are a couple of crucial considerations investors should make that support buying the stock.
First, while oil is its most important revenue and earnings generator, as previously discussed, the dramatic slump in the price of gas was a big reason for Devon Energy's dividend reduction over the last year. The price of natural gas remains volatile, but the big slump from the previous surge in 2022 (caused by the conflict in Ukraine) is probably over.
Second, while Devon doesn't have any downstream operations, it has a hedging strategy in place that protects the "fixed" (currently $0.20 a quarter) part of its "fixed plus variable" dividend strategy. For reference, the fixed dividend equates to a 1.95% dividend yield at the current stock price of $41.
For an indication of what kind of dividend Devon could pay, consider that on the third-quarter earnings presentation management outlined that a theoretical price of oil of $60 a barrel and a stock price around $47, Devon's dividend framework would result in a yield of 3.5%. Interpolating using today's stock price of $41 indicates a 4% yield at a price of $60 a barrel.
Image source: Getty Images.
With the current price of oil at $73.40 per barrel, Devon Energy has plenty of potential to deliver significant dividends to investors in 2024. Meanwhile, an ongoing share repurchase program gives management the firepower to buy stock and, in doing so, support the share price.
Aehr Test Systems for enterprising investors
In a previous article, I suggested investors should prepare for some volatility in early 2024. The reason is that growth is slowing, and several companies are starting to report sales shortfalls relative to guidance. It's perfectly normal cyclical behavior and is to be expected after a sustained period of relatively higher interest rates. But more importantly, it's how long they stay high, and the Federal Reserve has hiked rates since the start of 2022.
These conditions create risk for many companies, especially ones like semiconductor testing solutions company Aehr. Not only is it exposed to the cyclical risk inherent in semiconductors, but it also has significant stock-specific risk due to its heavy reliance on just a few customers, most notably ON Semiconductor.
Unfortunately, that reliance is hurting Aehr now because ON Semiconductor is cutting back on its expansion plans on the back of a single original equipment manufacturer, reducing demand in light of slowing electric vehicle (EV) sales. That wasn't great news for ON Semiconductor, and it's not great news for Aehr Test Systems.
As such, Aehr CEO Gayn Erickson lowered the company's full-year guidance on the company's recent fiscal second-quarter earnings call for the period ended Nov. 30, 2023, saying, "We are reducing our revenue expectations of at least $100 million this fiscal year by 15% to 25% to a range of $75 million to $85 million."
Image source: Getty Images.
This sort of variance around performance is only to be expected at this stage of the economic cycle. But here's the thing: There's nothing wrong with the slowdown in the growth rate of EV sales that won't be fixed by lower interest rates later in the year. Moreover, now that expectations have been reset, Aehr trades on less than 22 times the estimated 2024 earnings. That's not a bad valuation for trough earnings in a cyclical company.
ON Semiconductor gives earnings on Feb. 5 and investors interested in buying into Aehr should monitor them closely, as both stocks are attractive for investors who like buying into recovery plays.
