The year hasn't been kind to shareholders of Wells Fargo & Company (NYSE:WFC), ConocoPhillips (NYSE:COP), and CF Industries (NYSE:CF). Yet despite their struggles each company has mustered some positive developments in recent months that could help give their respective stocks a major boost heading into the new year.
Let's take a closer look at these 'comeback player of the year' candidates.
Can Wells Fargo Perform in a Low Rate Environment?
Wells Fargo stock (-59% year-to-date) has sunk lower and lower as the year has progressed following a couple of big earnings misses in the first and second quarters. Historically low interest rates have weighed on net interest income and Wells has had to set aside a lot of money for loan loss provisions during the pandemic.
But while it may be hard to envision Wells Fargo and its big bank peers doing well in a low rate environment, the company has some encouraging catalysts that could spark a turnaround.
The mortgage banking business is an area of strength and could lead Wells Fargo out of the doldrums in 2021. Mortgage banking income has soared during the last two quarters amid a surge in residential mortgage originations. A U.S. housing market that appears to be heating up bodes well for Wells Fargo's mortgage business.
Trading activity has also been a welcome contributor to recent performance. The pandemic has bred a new group of stock traders that will likely continue to trade heavily and provide income for Wells Fargo and other brokerage platforms.
Keep in mind, Wells Fargo generates roughly half of its revenue from non-interest income. As the economy continues to recover next year, things like credit and debit card, loan, and deposit related fees should all gradually improve.
Yet despite these pockets of strength Wells will likely face ongoing legal challenges. But this headwind should subside going forward as the company's initiatives to enhance their compliance and risk management capabilities continue to gain traction.
Despite the tough year, Wells Fargo has maintained its dividend payment. This along with it’s a price-to-book ratio that is near its five-year low and well below that of its peer group, make Wells Fargo an intriguing value play for 2021.
Can the Concho Takeover Energize ConocoPhillips?
Although in the near-term ConocoPhillips stock, down 55% year-to-date, will trade in reaction to the Presidential election developments, there are reasons to believe the company can execute a turnaround regardless of who wins the White House.
In the short-term Conoco's acquisition of Concho Resources will help it survive the low oil price environment. But more importantly, it will make the combined company a stronger player in the oil and gas market. The combined low-cost producer is forecast to produce more than 1.5 billion barrels of oil equivalents daily. With acreage in three of the major oil plays—Eagle Ford shale, Bakken shale, and Delaware basin—Conoco stands ready to crank up production levels as commodity prices improve.
The Concho deal is expected to close in the first quarter of 2021 and become immediately accretive to the company's key performance metrics. This could substantially improve EPS, drive stronger free cash flow, and expand dividend coverage. Conoco expects to generate annual cost savings of approximately $500 million by 2022 from the addition of Concho.
ConocoPhilips also has a healthier balance sheet than its industry peers. Long term debt comprises a manageable 32% of the capital structure and it sits on $2.5 billion of cash. As global demand for oil begins to pick up, the company will be in a better position to capitalize on growth opportunities absent a big debt burden. This could come in the form of organic growth as well as through another complimentary acquisition.
The company's financial strength should also continue to support dividend payments and share buybacks for many years to come. Management is targeting $20 million of dividend payments and $30 million of share repurchases this decade. This means patient long-term invests can expect a gush of returns through the ebbs and flows of the oil cycle.
Can CF Industries Harvest Fresh Growth?
CF Industries is a lesser known member of the S&P 500 whose shares have retreated over 40% this year. The leading producer of fertilizer for agricultural use has been hampered by lower prices across all its product categories.
This has been largely due to abundant global fertilizer supply during the pandemic. Meanwhile, lower prices of corn and other crops have made farmers reluctant to commit to spending on fertilizer. Weak demand in China, a major purchaser of agricultural commodities, has especially hurt.
But looking ahead to 2021, CF Industries sees greener pastures ahead. Management has a bullish outlook on global demand for nitrogen fertilizer including a positive view on demand trends in the key markets of Brazil and India. Longer term, CF Industries is expected to benefit from access to lower cost North American natural gas used to manufacture its products and demand growth that outpaces the growth of new production facilities.
Like ConocoPhilips, CF Industries is also expected to get a boost from a major acquisition. This past April the company bought rival Terra Industries to form the world's leading global nitrogen fertilizer company.
CF Industries is a very shareholder friendly company that has an active $1 billion share repurchase program that is authorized through the end of next year and pays a significant portion of cash flows as dividends. With a well above market dividend yield of 4.4% and more favorable economics ahead, CF Industries is a stock to plant in your portfolio for 2021.
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