We recently published a list of 10 Best Depressed Stocks To Buy Heading into 2025. In this article, we are going to take a look at where Seadrill Limited (NYSE:SDRL) stands against other best depressed stocks to buy heading into 2025.

Will a Strong Earnings Season Help Overcome Election Volatility?

In one of our recent articles about 10 High Growth Non-Tech Stocks That Are Profitable in 2024, we talked about how the US market has continued to show resilience against economic and market challenges. We also covered the analysis of Anastasia Amoroso, iCapital chief investment strategist regarding the current market conditions. Here’s a short excerpt from the article:

“Anastasia Amoroso, the iCapital chief investment strategist, recently appeared on a CNBC interview to talk about the current market conditions.

She mentioned that investors had many reasons for caution to start October. Several outside moves had to be digested including yields spiking, the price of oil spiking, and some resurgence for the dollar. However, the market has been able to absorb all these moves quite impressively. She mentioned that the Fed is not likely going to cut rates by 50 basis points in the consecutive meetings and the markets have now repriced it to 25 basis points cut, which is now reflected in the yield prices.

Amoroso thinks that what could have been a bumpy start to the month has now paved the way for a soft landing momentum. While talking about how the rate cut is now a moving target for the Fed, she mentioned that it has always been known that the Fed reacts to data and it is not bad news that data is pointing towards an upside. Moreover, what’s more interesting is that not only is the Fed talking about the economy being on a strong footing but corporations including banks are calling it a soft landing, which is breathing new life into the market.”

As the market has entered the early stage of the earnings season, analysts are expecting earnings to help buffer the volatility that might come from the elections. Alan McKnight, Regions Wealth Management CIO, joined CNBC for an interview to talk about how the rate cut environment is reflected in the earnings. He thinks although it is very early to make any judgments regarding the earnings, however, as far as the recent data is concerned it is painting a positive image. He also mentioned that the good thing about the earnings so far is that overall management and CEO sentiment regarding their companies is positive and most are not expecting any weakness as we approach the end of the year.

While answering the question whether the current positivity is a trickle-down effect of the interest rate cut. McKnight thinks that the effect of the rate cut has not kicked in yet, what we are witnessing is a very strong consumer environment led by encouraging spending. The US consumer has been resilient and wants to spend, moreover, the rate-cut environment is enabling them to continue spending.

The earnings expectations have been lower moving in but they continue to rise as we reach the year’s end. McKnight thinks that this is going to be one of the key challenges for companies moving into 2025. Companies have been able to layer in some operating margin improvement, including sales growth. However, next year, they will have to sustain this growth, which is going to be difficult. Therefore, he sees growth coming down in 2025. He also pointed towards valuations becoming a problem if growth comes down, because the market is currently trading at a forward price-to-earnings ratio of 22 to 23, and companies would have to at least maintain current-year earnings growth to be fairly valued.

The interest rates are coming down, which should technically bring down the cost base for the market. However, the cost base never comes down as quickly as the market would like, similar to inflation, that’s where companies would find it challenging to maintain high growth rates.

McKnight advised that investors should stay balanced while investing, he mentioned that investors shouldn’t be chasing high flyers or just the big names that have been working, instead have a broad portfolio based on quality. Moreover, while mentioning the sectors he likes, McKnight mentioned Utilities and Communication Services. He thinks that the current news regarding the expected growth in the power sector along with the discussion of nuclear power for data centers is going to shape utilities over the next 3 to 5 years.

Our Methodology

To curate the list of the 10 best-depressed stocks to buy heading into 2025, we used the Finviz stock screener and Yahoo Finance. We defined depressed stocks as those trading within 0% to 3% of their 52-week lows. Using the Finviz stock screener, we got an aggregated list of stocks that fit our criteria. Next, we ranked these stocks based on the analyst upside potential sourced from CNN. All indicators were recorded on October 17th, 2024.

Moreover, we have also mentioned the number of institutional investors holding each stock sourced from the Insider Monkey database. Please note that the list is ranked in ascending order based on the analyst upside potential.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Seadrill Limited (NYSE:SDRL)

52 Week Range: $36.01 – $56.46 

Current Share Price: $36.54 

Number of Hedge Fund Holders: 41

Analyst Upside Potential: 62.23%

Seadrill Limited (NYSE:SDRL) ranks 4th on our list of best-depressed stocks to buy heading into 2025. It operates in offshore drilling, primarily for the oil and gas industry. They specialize in drilling in various seawater depths from shallow waters to more than 12,000 feet around the world. The company operates through a fleet of specialized vessels and rigs including, drillships, Semi-submersible Rigs, and Jack-up Rigs.

In the second quarter of fiscal 2024, Seadrill Limited (NYSE:SDRL) reported an EBITDA of $133 million on total operating revenues of $375 million, resulting in an EBITDA margin of 35.5%. The company had a strong first half of the year ending June 2024, achieving a combined EBITDA of $257 million. However, expectations for the second half have been lowered due to revised contract start dates for two rigs moving to Brazil and uncommitted availability on other rigs.

Management is preparing for a transition year in 2024, operating fewer rigs while focusing on long-term contracts and necessary maintenance. The company is willing to incur idle time to reposition and reintegrate rigs effectively. For instance, the West Polaris was relocated from a contract in India to a market-rate contract in Brazil.

Operationally speaking, 5 rigs of the company achieved nearly 100% uptime during the quarter, showcasing strong performance and commitment to continuous improvement. Moreover, it also generated $79 million in cash flow from operations and $36 million in free cash flow during the quarter.

Patient Capital Management stated the following regarding Seadrill Limited (NYSE:SDRL) in its Q3 2024 investor letter:

“Energy names disappointed in the quarter following commodity prices lower throughout the period. We took the opportunity to add to our highest conviction ideas. We look to names that have idiosyncratic opportunities and are attractive in a variety of different commodity price environments. Many see risk to energy prices over the next year as supply is expected to outstrip demand by 1.3mb/d even before assuming any incremental OPEC supply comes onto the market. With commodities, consensus is rarely right. We assess companies on through cycle returns and normalized prices. From this perspective, we see a handful of attractive opportunities, including Energy Transfer (ET), Seadrill Limited (NYSE:SDRL) and Kosmos (KOS).

Seadrill benefits from a consolidated industry, with more rational players, and an emerging supply and demand imbalance. We think over time as offshore drilling plays a bigger role as the marginal producer, Seadrill will benefit from more attractive contract prices.

Seadrill Limited (SDRL) is the fourth largest pure play deepwater drilling specialist. The company emerged from bankruptcy in February 2022 with a net cash position. The company is set to benefit from limited supply and increasing demand in the deepwater drilling rig market. Nearly half of all deepwater drilling rigs in the world were scrapped during the last decade. In addition, player consolidation puts the industry in a more rational position than we have seen historically. As land-based oil production growth comes under pressure, offshore production is receiving renewed interest. With a highly specialized rig base, the company is benefiting from increasing prices which are leading to strong FCF yields given the limited need for CAPEX. The company has committed to returning 50% of free cash flow to shareholders via dividends and buybacks. Over the last 12-months, the company has reduced shares outstanding by 17%. As old contracts roll-over and new contracts are signed at the higher day rates, operating profit and FCF are expected to expand dramatically. Seadrill could either consolidate the space or be acquired.”

Overall, SDRL ranks 4th on our list of best depressed stocks to buy heading into 2025. While we acknowledge the potential of SDRL to grow, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.

Disclosure: None. This article is originally published at Insider Monkey.