After settling with a Federal investigation in 2013, Wall Street trader Steven Cohen restarted his hedge fund operations under a new name, Point72 Asset Management, and with a strict series of internal reforms to toe the line with regulators. Cohen remained in the top spot, and brought in new management to help him steer the company.
His success has been impressive. The self-made man from Great Neck, New York has built Point72 into a giant of the hedge fund industry, with over $75 billion in total assets under management. That figure includes more than $19 billion worth of stock holdings, reported quarterly on the 13F forms, which draw the attention of investors everywhere.
What’s drawn our attention are three holdings that Cohen boosted into the $85 to $99 million range. The large purchases caught our eye, and we ran the stocks through the TipRanks Stock Screener – all three have a ‘Strong Buy’ consensus rating and over 20% upside potential. That alone would be enough to attract the attention of a major fund, but we’ve taken a deeper dive to find out what else makes these stocks so compelling.
Pioneer Natural Resources (PXD)
First on the list is a Texas oil company. Pioneer operates in the Permian Basin of West Texas, one of the world’s largest oilfields, and has over 1 billion proven barrels of recoverable oil equivalent. The breakdown in the company’s reserves is 53% oil, and the rest split evenly between natural gas and usable natural gas liquids. In production terms, Pioneer put out 319 thousand barrels per day in 2018.
Falling fuel prices have hurt PXD in recent months, despite solid growth in production. In the Q3 report, the company detailed a 9% year-over-year production gain, to 351 barrels per day. At the same time, revenues slipped 6%, to $2.33 billion, on lower oil and natural gas prices. Earnings, while down year-over-year, beat the forecast and came in at $1.99 per share.
The earnings result was considered a minor win, as it allows the company to sustain both its modest quarterly dividend of 22 cents per share and its high rate of free cash flow. Looking ahead, Pioneer expects higher production in Q4, from new wells and gas processing plants that came online this year, and full-year cash flow of $3.4 billion, more than enough to fully fund all planned capital expenditures.
So, in PXD, we have an oil company with valuable assets in a necessary industry, with a clear path to maintaining both output and extraction infrastructure improvement. These are attributes which easily explain Point72’s purchase of 686,750 shares in PXD. The fund’s purchase brings its total holding in Pioneer to 696,668 shares, worth $89.06 million as of the close of trading Friday.
Wall Street’s analysts would agree with Steven Cohen’s decision to purchase PXD. Writing from Susquehanna, Biju Perincheril sums up the company’s recent performance: “PXD had a solid quarter, highlighted by a modest oil/total production beat … on much lower capital spending. PXD continues to be one of our top ideas given a combination of free cash flow capacity, production growth, and inventory depth.” His Buy rating comes with a $183 price target, implying room for 43% growth to the upside. (To watch Perincheril’s track record, click here)
RBC Capital analyst Scott Hanold is also bullish on PXD, and writes that the company has plenty of potential: “PXD’s production growth profile, balance sheet, and free cash flow generation are best-in-class and differentiate vs. peers. We expect PXD shares to outperform because of the good balance sheet and upside opportunity in its portfolio. The company has one of the largest and most contiguous acreage positions in the core of the Midland Basin (Permian).” Hanold set a $180 price target with his Buy rating, indicating confidence in a 41% upside for the stock. (To watch Hanold’s track record, click here)
Pioneer maintains a Strong Buy from the analyst consensus, based on 10 recent ratings. These include 8 Buys and 2 Holds, giving a 4 to 1 advantage to the bulls. Share are trading at $127.84, so the $169 average price target suggests room for about 30% upside. (See PXD stock analysis on TipRanks)
Restaurant Brands International (QSR)
Like Pioneer, Restaurant Brands was formed in 2014. QSR is the result of a merger between Burger King, which needs no introduction, and Tim Horton’s, Canada’s most popular coffee shop and restaurant chain. The company also owns Popeyes Louisiana Kitchen. QSR is the world’s fifth largest fast food chain, and saw $5.36 billion in revenue in fiscal 2018.
Shares in QSR slipped at the end of October, after a mixed Q3 report, but have since regained the loss the stock was mostly flat in November. The disappointing aspect of the Q3 repot was a 1.4% year-over-year same-store sales decline in Tim Horton’s. Burger King and Popeyes both saw growth, with BK gaining on interest in the Impossible Whopper and Popeyes showing a 9.7% same-store sales increase. Total revenues for the quarter were $1.46 billion, just under the $1.47 billion forecast, while the 72-cent EPS met the estimates.
The earnings report would not have made much of an impression if Tim Hortons didn’t make up 60% of the company’s overall revenue. The BK and Popeyes segments have been growing consistently since Q3 2018, and the stock has seen overall gains of 25% in 2019, matching the S&P 500 index for the year. Management is upbeat about plans to improve the Tim Hortons brand growth in coming months.
QSR’s solid foundation and proven long-term growth convinced Cohen to boost his fund’s holding in this stock. Point72 disclosed a 903,767 share purchase of QSR in Q3. Timing is an important point here, as the fund bought the shares before the Q3 earnings were released, and the fund’s total holding in the stock has since lost $7 million. Point72 still holds $77.87 million in QSR, however; it will be interesting to see what the firm discloses on its next 13F.
Analysts were cautious after the Q3 report, but still willing to rate the stock a Buy. Dennis Geiger of UBS wrote, “3Q call commentary focused on Tim Hortons (TH) comp weakness and plans to improve performance, while highlighting sustainability of Burger King and Popeyes strength… Strategic growth plans should support better results, but over time, and we believe many investors are likely to view a meaningful turnaround as a show-me story…” Geiger gave the stock a Buy rating and an $86 price target, suggesting a 31% upside. (To watch Geiger’s track record, click here)
Barclays’ 5-star analyst Jeff Bernstein takes a bit less ambiguously bullish stance. He wrote, after investor meetings with company management, “QSR is a pure-play global franchisor of three powerful brands, with long-term global growth potential, led by international unit expansion. Otherwise, a ~100% franchise mix and elevated leverage supports a return of cash. A combination of global diversification, well-managed cost structure, and future M&A potential leaves us bullishly inclined.” Bernstein’s Buy rating comes with an $80 upside, showing room for a 22% upside. (To watch Bernstein’s track record, click here)
QSR’s Strong Buy consensus rating is based on an impressive 11 Buys, indicating confidence in the stock. Only two analysts rated it a hold, and even they see an upside to the stock. The average price target of $79 implies a 22% upside potential from the current share price of $65. (See QSR stock analysis on TipRanks)
US Foods Holding (USFD)
Our final stock on this list is another food service company. US Foods is a major distributor in the industry, providing well over 300,000 branded products to over a quarter million customers nationwide. The company’s clientele includes restaurants, healthcare facilities, hotels, schools, and government institutions. Feeding people is another necessity-driven business niche, and US Foods sees over $25 billion in annual revenue. Like QSR above, USFD has gained 25% this year.
US Foods flat-out beat the Q3 earnings estimates, showing 65 cents in EPS and $6.53 billion revenue. The year-ago numbers were 55 cents and $6.15 billion – so this most recent quarter was sharp annual gain. The revenue and earnings gains fully justify Point72’s decision in Q2 to buy up more than 854,000 shares of the stock, bringing the fund’s total holding to 2,423,762 shares, worth $96.39 million. It was a 55% increase in Cohen’s holding of the stock.
Evaluating US Foods for Wells Fargo earlier this month, 4-star analyst Edward Kelly laid out a strong investment thesis: “USFD, which is the No. 2 player in the consolidating food service industry, represents an attractive investment option, in our view. The company has hit the ground running since its May 2016 IPO, generating strong earnings growth and ramping up M&A, while making progress in deleveraging the balance sheet. Though USFD has struggled to execute more recently as operating headwinds in the industry have accelerated, we continue to believe the company’s strategy overall is sound.” Kelly reiterated a Buy rating on the stock, while his $54 price target indicates an upside of 36%. (To watch Kelly’s track record, click here)
Jefferies analyst Christopher Mandeville is also bullish on USFD, seeing the stock as well-positioned to survive an economic downturn. He writes, “We believe USFD’s diverse customer mix and greater exposure to Healthcare/Gov’t/Education vs. peers (~25% vs. ~17% SYY and ~13% PFGC) provide relative insulation in the event of a downturn given this segment’s long-term contracts and more consistent purchasing habits.” Mandeville sees a 23% upside to the stock, indicated by his Buy rating and $49 price target. (To watch Mandeville’s track record, click here.)
US Foods has had fewer analyst reviews in the last three months than the other stocks on this list, but it still has 5 Buys opposed to just 1 Hold – giving it a consensus rating of Strong Buy. Shares were trading for $39.77 at Friday’s close, and the $48.83 price target suggests an upside of 22%. (See US Foods stock analysis on TipRanks)