While the economy is booming, there are some warnings signs starting to flash. Hedge fund manager Ken Griffin – who started trading at age 19, and now at 51 has amassed a fortune worth $15 billion – spoke about some of the near- and long-term risks in a recent interview.
Griffin sees inflation as a danger in the longer term, mostly because the financial experts lack tools to determine when inflationary trends are starting. Griffin recounts how his firm’s best analysts were caught flat-footed in 2018 when the Fed started raising rates. Regarding the lack of accurate predictive foresight, Griffin says, “If there were inflation, the markets are utterly and completely unprepared for that.”
But inflation, being invisible for now, is a long-term worry. Griffin sees the coronavirus outbreak has a larger threat, at least for the present. Griffin notes that a number of major companies – Apple is a particularly good example – have already announced lower Q4 and Q1 earnings, disrupted supply chains, and even store closings in response to the viral epidemic as it expands out of China. Griffin describes the epidemic as “probably the most concrete short-run risk we see in the financial markets globally.”
The coronavirus is even impacting diplomacy. Griffin points out that specific terms of the US-China Phase 1 trade agreement have not yet begun implementation. The agreement puts an obligation on China to increase imports of US products on the order of $200 billion for the next two years – but that is on hold with large parts of China paralyzed by quarantines and global trade and travel patterns facing growing disruption.
So, it may be interesting to see which stocks Griffin is willing to buy, given his view of the risks ahead. A look at the most recent 13F filing by Citadel, his hedge fund, reveals three new positions that TipRanks’ Stock Screener reveals as “strong buys.” Let's take a closer look.
NexTier Oilfield Solutions (NEX)
The first of Griffin’s new positions, we’ll look at is NexTier, a player in the oil field support services sector. Companies like NexTier don’t actually drill for oil, but they provide the support that the exploration and drilling operators need get the oil out of the ground. Without this support – the rig services, well completion, pumps and piping for fracking operations, and fluid management and disposal – the great oil fracking boom that has helped to power the US economy over the past 15 years could not have occurred.
NEX is a new ticker in the market, formed during the third quarter last year when Keane Group and C&J Energy Services merged. The name change to NexTier reflects that the transaction was a merger of equals. NEX inherited the performance legacy of Keane, and the combined company reported Q3 earnings and revenues above the forecasts. It was the second quarter in a row that the company beat expectations. Looking ahead, the company will be reporting Q4 results on March 10, and is guiding for a net loss of 2 cents per share. The company is also guiding revenue in the $640 to $660 million range, slightly higher than previous guidance.
So, we have a well-positioned services company in the oil industry – and Griffin’s fund bought up 6.169 million shares. That purchase represents a new stake for Citadel, and it’s worth over $30 million dollars at today’s prices.
Conventional wisdom says the move is worth it. Sean Meakim, reviewing the stock for JPMorgan, is even more bullish. He writes, “We view NexTier as a leader in the industry in terms of driving technology improvements, and think it can continue to make strides in 2020to offset the macro headwinds. We model NEX delivering FCF of ~$50mm in 4Q19, sufficient to provide fuel for the company’s $100mm capital distribution plan…”
Meakim puts a $9 price target on NEX shares, suggesting room for an impressive 84% upside potential. (To watch Meakim’s track record, click here)
Overall, NexTier has a Strong Buy rating from the analyst consensus, based on 4 Buys and 1 Hold. The average price target of $7.90 implies an upside of 74% for the coming year. (See NexTier stock analysis at TipRanks)
Aon Plc. (AON)
Next on our list of new Citadel positions is Aon, a $50 billion player in the professional services and risk management industry. Aon is known as a major insurance broker, and works with large-scale clients to negotiate and place insurance policies, advise on health and other benefits, organize retirement compensation schemes, and even outsource human resources.
Aon’s revenues and stock performance have been on an upward trajectory over the past year. In Q4 2019, the company reported $2.89 billion in total revenue, in line with the forecast and the year-ago number by 4%. EPS, at $2.53, was 1.6% higher than expected and most impressive 74% above the Q4 2018 figure.
Share gains have been impressive, too. AON is up over 30% in the past 12 months. Complementing the share gains, AON also offers a modest dividend. At 0.79%, the yield is nothing to write home about, the share price is high enough that the annualized payment is $1.76 per share. It’s small addition for investors to count among the gains.
Griffin clearly is impressed by the prospective gains here. His fund snapped up over 350,000 shares of Aon, which are now worth $77.9 million.
Covering AON for Wells Fargo, analyst Elyse Greenspan writes, “We think AON is positioned to outperform as a stand-alone company or if they acquire WLTW. We believe a stand-alone AON is positioned to see industry-leading organic revenue growth and has several tailwinds to its FCF in 2020. If there is a deal, it would likely be because AON believes they can pull a healthy level of expenses out of WLTW without significant revenue disynergies. Recall AON and WLTW entered into deal negotiations last year that were called off in March 2019 and the one-year stand still on discussions ends on 3/6/20. Further, AON’s CEO has been an expense master during his tenure at AON and has been able to consistently pull expenses out of the company."
Greenspan's $265 price target suggests an upside potential for AON of 20%. More importantly, she upgraded her stance on the stock, shifting from Neutral to Buy. (To watch Greenspan’s track record, click here)
Aon’s Strong Buy consensus rating is supported by 5 analyst reviews, including 4 Buys and just 1 Hold. The stock is selling for $237.25, and the average price target of $237.25 indicates room for a modest 7% upside. (See Aon stock analysis at TipRanks)
Digital Realty Trust (DLR)
The final stock on our list is a Real Estate Investment Trust (REIT), specializing in data center and other tech-related properties. DLR owns properties around the world, in 15 countries, and boasts over 210 operating data centers. Like all REITs, Digital is required by US tax law to pay back the bulk of its profits to investors.
Those profits can be substantial, as the company brings in over $3 billion annually on the top line. Earnings were robust in Q4 2019, at $1.62 per share. Estimated EPS for Q1 2020, to be reported in April, is $1.59.
With robust earnings, DLR has no problem maintaining its dividend payments. Most REITs pay out strong dividends, as it is an easy way to remain in compliance with tax code regulations on profit sharing. DLR offers a 3.3% dividend yield, paid out quarterly at $1.08 per share. The payout ratio, which compares the quarterly dividend payment to the quarterly earnings, is 66.7%, indicating that the company can easily sustain the dividend given current income levels. DLR has raised its payment in each of the last three years.
Strong earnings, a reliable dividend, and a pattern of long-term gains (this stock is up 34% over the last three years) are exactly the features that will attract attention from a hedge fund. So, it should be no surprise that Griffin’s fund picked up over 249,000 shares of DLR in Q4. Like the other stocks in this article, this is a new position for Griffin. At current prices, the fund’s stake in Digital Realty is worth $35.6 million.
Weighing in on the stock for SunTrust Robinson, 5-star analyst Greg Miller is upbeat, saying, "We believe investors will continue to respond favorably to the execution of the business model. Sequentially higher 4Q signed leasing is not typical, underscoring DLR’s momentum… we believe the stock will continue to move higher."
Miller’s Buy rating is supported by his $152 price target, which suggests room for 16% upside growth to the stock. (To watch Miller’s track record, click here)
Wall Street’s analysts have given DLR 6 Buys and 2 Holds recently, making the consensus view a Strong Buy. The average price target is $137, which implies a small premium of 5% from the current share price of $130.38. (See Digital Realty stock analysis at TipRanks)