HSBC downgrades Chevron
Analyst Gordon Gray downgraded Chevron to hold from buy, saying that oil stocks have limited upside despite looking historically cheap.
“It’s tempting to view the oil majors as severely undervalued at current levels, but we believe the sector’s complete lack of response to a range of positive catalysts renders historic valuations increasingly irrelevant, and attests to pervasive market concerns about the sector’s long-term outlook,” according to the note. “These concerns will only be addressed as the companies transform over time – in the meantime, we believe any significant valuation upside will be difficult to achieve.”
After a strong start to the year as the US economy reopened, the Energy Select Sector SPDR Fund has fallen more than 5% since the end of May, despite rising oil prices.
According to HSBC, Chevron’s stock already reflects potential good news from higher oil prices.
“Chevron is one of the most leveraged stocks in the sector to improvements in crude prices, and its dividend is well supported,” the note said. “However, we believe positive newsflow on the potential for share buybacks has now been largely discounted in valuations.”
The bank reduced its price target for Chevron to $112 per share from $127, representing a 12% increase over the stock’s closing price on Wednesday. The stock is up 18% year to date, but it lags behind the broader oil and gas sector.
As part of the call, HSBC downgraded European oil companies Shell and Eni.
Stocks and Covid case
Since the virus sent stocks tumbling at the start of the pandemic in early 2020, increases in U.S. infection levels have not resulted in long-term downturns in the S&P 500, according to market data.
Between the date of the first reported U.S. case in January 2020 and the April peak in average daily cases amid widespread economic shutdowns, the S&P 500 fell 15.6 percent. In the 14 months since, nationwide case counts have increased significantly four times, and the index has been positive during each of those periods.
The S&P 500 rose 1.52 percent on Tuesday, recouping nearly all of Monday’s losses.
“I think growth will be sustainable, and I don’t think Covid will kill us off again,” Leuthold Group chief investment strategist Jim Paulsen said on Tuesday. “We’ve already vetted this crisis once, and I believe it loses its ability to do so after that.”
Stocks have not had an easy time in recent weeks or months as the number of reported cases has risen. For example, during a worsening outbreak in June 2020, the S&P 500 fell nearly 6% in one day and experienced 10 days of 1% or greater declines while case counts rose to pandemic highs over the winter. The index had its worst day since May on Monday.
However, in each scenario, the virus news has not been a deafening enough alarm to halt the market rally.
Of course, Covid case counts have not been the only metric that investors have been watching during an eventful 2020 and 2021 in which a presidential election, vaccine development news, inflation, and earnings have all influenced the market.
Paulsen speculated that the bond market may be more closely linked to the virus’s path, stating that “when yields have gone down, it’s starting to connote that maybe Covid is a problem again.” Indeed, the 10-year Treasury yield has fallen during four of the five periods of rising case counts, including a drop from 1.48 percent to 1.22 percent since the month’s low in average daily cases.
Anastasia Amoroso, an ICapital Network strategist, stated on Tuesday that while she monitors the bond market, hedge fund positioning, and earnings as market indicators, the delta variant is something that “we shouldn’t disregard.”
“If there’s one humbling thing Covid has taught us, it’s that no matter how quickly we want it to pass, it just doesn’t,” she said on “Squawk Box.” “It’s definitely lingering, so we shouldn’t dismiss it.”
This could be the next Tesla battery
The Amplify Lithium & Battery Technology ETF gained 3.7 percent on Wednesday, putting it on track for its best day since March 11. The gain came as investors returned to high-growth areas of the market, while the major stock indexes recovered from heavy losses to begin the week.
Ganfeng Lithium, Nouveau Monde Graphite, and Jinchuan Group International Resources were among the top gainers, all of which posted double-digit percentage gains. China-based electric vehicle companies Li Auto and XPeng were also on the move.
The fund, which has approximately $205 million in net assets, has gained approximately 14 percent this year. However, shares are down about 8% from their 52-week high in February 2016, owing to weakness in the clean tech sector.
Contemporary Amperex Technology, Tesla, BHP Group, BYD Company, Nio, and LG Chemical are the fund’s top holdings.
The Global X Lithium & Battery Tech ETF, which tracks the sector as well, gained more than 4% on Wednesday, bringing its 2021 gain to more than 30%. The fund’s net assets are approximately $3.9 billion, and its top holdings include Albemarle, Yunnan Energy, Ganfeng Lithium Co., and Eve Energy.
“LIT invests in companies across the lithium cycle, including mining, refinement, and battery production, spanning traditional sector and geographic boundaries,” according to the fund’s prospectus.
Lithium-ion batteries can be found in a variety of devices ranging from phones to computers to electric vehicles. They play an important role in the energy transition and are increasingly being used for residential and grid-scale storage. They enable power generated by renewable sources such as wind and solar to be stored and used when the sun isn’t shining or the wind isn’t blowing.