In this piece, we will take a look at the lowest-scoring stocks in earnings revisions, P/E ratios, EPS growth, and other indicators according to investment bank UBS.
With November 2024 having settled in and the US presidential election in its final stages, investors are also digesting the results of the latest earnings season. As had been the case for the first and second-quarter earnings season, Q3 was also focused on artificial intelligence. While Wall Street’s AI GPU darling, the firm whose shares are up an unbelievable 206% over the past twelve months, is yet to report its earnings, other consequential firms have got the ball rolling.
Two of these are among the most important players in the software segment of the AI industry. The first is known for its tightly-knit relationship with the firm behind ChatGPT, OpenAI. The second is the world’s largest social media company that has made waves in the AI industry with its open-source Llama AI foundational AI model. Starting from the former, its ability to generate AI profits primarily through its cloud computing division is baked into the narrative.
Since its earnings report, the shares are down by 4.9%. This is even though the firm’s revenue and earnings per share of $65.59 billion and $3.30 beat analyst estimates of $64.51 billion and $3.10. Along with the earnings and revenue beat, the software company’s Azure cloud computing business which also includes its enterprise-focused AI services grew by 33% annually or 34% on a constant currency basis. These also beat analyst estimates, so on the surface, one would expect the shares to rise.
However, Wall Street isn’t always focused on current performance, and for AI stocks, their narratives are built on future expectations. These expectations are priced into the stocks. For the software company, its weak guidance is at the center of the poor share price performance as the current quarter revenue guidance of $68.1 billion to $69.1 billion missed Wall Street estimates of $69.83 billion by more than half a billion dollars.
The software company was joined by the social media firm to report its earnings on the same day. The Facebook parent’s shares are also down since the earnings report as they have lost 3.3% after recovering from the bottom of a 5.3% loss. Its earnings report, like the post-report stock performance, also mirrors the software company’s results to an extent. For starters, the social media firm also beat analyst revenue and EPS estimates. It posted $40.59 billion in revenue and $6.03 in earnings per share to beat analyst estimates of $40.29 billion and $5.25. Driving the beat was higher advertising revenue which grew by 18.7% annually to sit at $39.9 billion.
However, while the firm’s net income jumped by 35% to touch $15.7 billion, it was the slowest growth in over a year. Additionally, the firm reported that it had 3.29 billion active daily users during the third quarter, which was lower than the 3.31 billion in analyst estimates. Another factor that didn’t impress investors was its AI-driven capital expenditure. The firm raised the lower end of its full-year capital expenditure to $38 billion from $37 billion and kept the high end intact at $40 billion. Higher expenditures increase the return that investors expect and reduce payouts in the form of dividends and share buybacks. Consequently, the stock tumbled after the earnings report.
These two AI-driven earnings reports are part of a market that is now facing lower rates, higher growths, and the culmination of a bitterly fought presidential election. In a recent report, investment bank UBS took an optimistic view of the US stock market. It noted that from “a macro perspective, the combination of slowing but durable economic growth, healthy earnings growth, and continued Fed rate cuts is supportive.” The bank is also optimistic about AI and particularly about the broader category of firms apart from the GPU designer that has seen most of the share price gains so far.
In its report, it notes that “AI-related companies that span semiconductors, cloud service providers, devices, and data centers account for over one-third of the S&P 500 by market cap. We expect continued growth in AI investment spending to drive revenues and profits.” However, according to UBS, AI is not the only lucrative stock market sector offered by the US stock market. The bank adds that the “S&P 500 also offers exposure to secular growth in longevity through various US medical device companies. Many US companies are also playing leading roles in the energy transition via electric vehicles, renewables, and energy efficiency.”
On the topic of interest rate cuts, the report outlines that “50bps cuts at similar labor market conditions as today have historically been positive for equities.” These labor conditions are determined by the 3-month average for US nonfarm payrolls, and UBS also believes that rate cuts by the Federal Reserve can reverberate across global markets. It notes that “Historically, Fed rate cuts of more than 50bps when the market was within 1% of all-time highs have been rare. It only happened during the Volcker era in the mid 1980s. The S&P 500 rallied more than 20% in the 12 months following the jumbo cuts. Also, Fed rate cuts tend to reverberate positively across global equity markets, with Asia ex-Japan and emerging markets as the primary beneficiaries outside the US.”
Finally, with the 2024 US Presidential Election over, the bank’s report released ahead of the election also commented on the outcomes on Wall Street. It shared that “S elections are a short-term risk; for instance, if former President Donald Trump is elected, markets may quickly price potential tariffs. However, we would see dips as buying opportunities and recommend gradually phasing in equity exposure.”
A financial trader intently monitoring the stock market on multiple screens.
Our Methodology
To make our list of UBS stocks with improving quantitative indicators, we chose the firm’s top stocks that are seeing improvements in EPS growth, P/E ratio, and other indicators. Stocks within each sector were ranked by the number of hedge funds that had bought the shares during Q2 2024. The sectors themselves were ranked by the cumulative number of funds that had been invested in the firms in descending order.
Why are we interested in the stocks that hedge funds pile into? 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).
29. Occidental Petroleum Corporation (NYSE:OXY)
Number of Hedge Fund Investors In Q2 2024: 62
Sector: Energy
Occidental Petroleum Corporation (NYSE:OXY) is a large and diversified oil and gas exploration and production company with a global operations base. Consequently, the fact that its shares are down 14.7% year to date is unsurprising given the weak oil industry globally and cratering natural gas prices in the US. For Occidental Petroleum Corporation (NYSE:OXY), its decision to acquire Permian Basin producer CrownRock for a $12 billion price tag has expanded its production during a period when the market has struggled to remain optimistic about global oil demand. The acquisition has also increased Occidental Petroleum Corporation (NYSE:OXY)’s debt and forced it to cut back on cash payouts. However, recovering oil prices stand to benefit the firm, and a potentially lower rate environment worldwide could see Occidental Petroleum Corporation (NYSE:OXY) benefit from its higher production and greater economies of scale to earn more margins.
Occidental Petroleum Corporation (NYSE:OXY)’s management commented on its debt reduction plans during the Q2 2024 earnings call. Here is what they said:
“Since the start of the year, we have closed or announced approximately $1 billion of Permian Basin divestitures. The proceeds from these sales will go directly towards debt reduction. This progress on divestitures, coupled with a robust organic cash flow underpinned by our steady focus on operational excellence has positioned us well to reduce our debt in the near term. Sunil will address this in more detail, but we’re excited that we’re on track to retire approximately $3 billion of debt during the third quarter, which means — which speaks to both the quality of our assets and our future cash flow potential.”
28. Devon Energy Corporation (NYSE:DVN)
Number of Hedge Fund Investors In Q2 2024: 52
Sector: Energy
Devon Energy Corporation (NYSE:DVN) is a mid-sized American oil and gas exploration and production firm. It has operations in the Delaware Basin, Eagle Ford Basin, and other regions. The stock is down 15% year to date, and while some of Devon Energy Corporation (NYSE:DVN)’s troubles have been due to the broader sluggishness in the energy industry, others are specific to the firm. For instance, amidst a trend of consolidation in the American energy industry which has seen mega-deals, Devon Energy Corporation (NYSE:DVN) has failed to emerge as a key player. While this would have been great if it hadn’t tried, its tries have led to investor loss of optimism. Word on the street is that some of Devon Energy Corporation (NYSE:DVN)’s three acquisition attempts earlier this year were rejected because the targets were wary of the effects of high production costs on the firm’s share price. However, the firm did finally complete an acquisition in September when it acquired Grayson Mill. The effects of this were immediate, with Devon Energy Corporation (NYSE:DVN) growing quarterly production by 9.5% during the third quarter to send the shares soaring by 1.5%.
Devon Energy Corporation (NYSE:DVN)’s management commented on the deal during the Q3 2024 earnings call. Here is what they said:
“Moving to Slide 10 and looking ahead to 2025, we expect another year of strong performance with total production forecasted to average around 800,000 BOEs per day. This production outlook is nearly 5% higher than what we communicated just a few months ago when we announced the Grayson Mill acquisition. Also, with the benefit of Grayson Mill and the operational momentum we established in 2024, we expect record oil volumes in 2025, averaging around 380,000 barrels per day.”
Hedge Fund Resource Center