Devon Energy (DVN)

Company Background

Founded back in 1971 by John Nichols and his son Larry Nichols, Devon Energy Corporation is an independent energy company engaged primarily in the exploration, development and production of oil and natural gas. Based in Oklahoma City, the company’s oil and gas operations are mainly concentrated in the onshore areas of North America, primarily in the United States.

Devon foresees strong oil production numbers in 2021 and also expects solid productivity from the Delaware Basin. The company has focused on implementing various cost-saving initiatives, which are also expected to boost margins. Devon’s sale of Canadian and Barnett Shale gas assets will allow it to focus entirely on its holdings in five high-quality oil-rich U.S. basins, and boost production from its domestic holdings. The company also has a stable liquidity and is able to easily meet its near-term debt obligations.

The company’s portfolio of oil and gas properties provides stable, environmentally responsible production and a platform for future growth. Pro forma for the Devon and WPX merger, the company’s fourth quarter 2020 daily production was approximately 300,000 barrels of oil, more than 125,000 barrels of natural gas liquids and about 920 million cubic feet of natural gas.

Current position – Financial Performance & Future Growth Prospects

With the reopening of the economy and the fact that people are eager to start traveling and moving around again we see this inevitably leading to a strong increase in the demand for almost all Oil related products in the US in the coming weeks and months. In addition to that, the seasonal factors will also help push the Oil price higher as almost every year the commodity tends to outperform in the May-August period, mainly as a result of the summer-related vacations and traveling. Thus, we see this as a positive growth catalyst for DVN.

The company’s business strategy is focused on delivering a consistently competitive shareholder return when compared to its direct competitors. Devon acknowledges that the business of exploring for, developing and producing oil and natural gas is capital intensive and that delivering sustainable, capital efficient cash flow growth is a key tenant to the company’s success. While Devon’s cash flow is

highly dependent on volatile and uncertain commodity prices, the company has developed a unique strategy that allows them to navigate all commodity price cycles efficiently. The strategy has four fundamental principles:

Proven and responsible operator – Devon operates its business with the interests of its stakeholders combined with strong environmental, social and governance values in mind.

Premier, sustainable portfolio of assets – Devon owns a portfolio of premium assets located in the United States. The company has continuously strived to improve the quality of its portfolio of assets, so that it remains capable of generating cash flows in excess of its capital and operating requirements, as well as competitive rates of return.

Superior execution – The company continuously works on optimizing the efficiency of its capital programs and production operations, with an underlying objective of reducing absolute and per unit costs and enhancing its returns. Devon also strives to leverage a company culture of health, safety and environmental stewardship in all aspects of our business.

Financial strength and flexibility – Devon strives to maintain a strong balance sheet, as well as adequate liquidity and financial flexibility, in order to operate competitively in all commodity price cycles. Capital allocation decisions are made with these principles in mind as the company prioritizes funding its core operations, protecting its investment-grade credit ratings and paying and growing its shareholder dividend.

The all-stock merger deal that Devon completed with WPX Energy will inevitably strengthen Devon’s position in the Delaware and Williston Basins. The deal makes a lot of business sense, as both of these companies have high-quality assets in the same region. Additionally, both Devon and WPX have stated multiple times that one of their main focus points is developing oil-rich U.S. assets.

Devon Energy is specifically focusing its business on introducing advanced technology, in order to increase the production capacity from wells. Additionally, the company has been implementing various cost savings initiatives and which has further helped Devon to generate higher returns on invested capital for its shareholders. In a business so heavily dependent on Oil prices, the company has implemented a great hedging strategy by hedging a large portion of its 2021 production in order to protect its cash flows.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 8 months taking the price from the October 30thlows in 2020 around $8 to the $32 52-week highs in the beginning of June, 2021. This represented an astonishing 400% gain for the stock in less than a year. However, we need to remember that the Energy sector altogether was heavily beaten down during the pandemic and despite the 400% appreciation of the stock price, DVN is still trading just 20% above its pre-COVID levels. The road to the current 52-week highs was not easy as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. The 2nd wave of the virus last Fall ended up pressuring again the Energy space heavily as all countries out there were following strict lock-down policies and no one was allowed to basically move. However, with the increased rapid vaccine development and distribution it seemed that we are slowly getting out of the woods and DVN clearly bottomed at the end of October, 2020 at around $8 per share. There were few massive 15-20% corrective movements that took place during the strong uptrend that followed, but the uptrend remained intact on all occasions. The stock has regained its popularity as after all it remains one of the leaders in the Energy space. The way that Devon has managed to evolve, structure its business, complete some notable acquisitions and mergers while keeping a solid and stable financial profile, has brought a lot of investors back into the stock. The stock is now a go-to choice for both small retail and large institutional investors looking to add some stable cyclical energy to their portfolios at a fair price.

We will start buying the stock at around $27, right above the first strong support at $26. If the price drops further in the short-term we would be buying more at the next support at $23. Our initial profit-taking target is set at $36, followed by the next target at $40 where we would be fully cashing in our profits.

The stock is currently sitting at $31 per share, which is just below its 52-week highs of $31.97 per share. We saw that the stock found a lot of buying interest around the $25 mark, as the stock accumulated a lot of bullish momentum and ended up breaking sharply higher above the $27 resistance at the end of May. This was a very good sign for the bulls, as it cleared the path up towards the $36 and potentially even $40 marks. The confluence of the horizontal, diagonal, 20 DMA, 50 DMA and 100 DMA dynamic support lines is currently spanned across the $25-27 area, which is expected to continue to bring a lot of buyers back to the market every time the price drops there. The stock has been rallying strongly ever since we saw the initial round of the rotation from growth into more cyclical and value oriented stocks back in February. The stock has moved up with more than 60% since then, which really shows that there is a lot of momentum behind that uptrend. Recently, the company reported strong Q1 financial performance results, surpassing the consensus estimates on both the top and bottom line.

The most recent rejection from the $32 intermediate resistance, shows that there might be some profit taking ahead in the stock, after the remarkable push higher that we saw throughout the last few weeks.

However, the $27 level should be viewed by investors as a great opportunity to buy into one of the cyclical and energy leaders at a discount and at a relatively fair P/E valuation. The recent failure of the price to break below the $25 support back in May and the subsequent sharp price appreciation could be taken as a signal for the presence of strong bullish interest around the above-mentioned support levels. This in turn confirms that the long-term uptrend is still intact and that the next bullish run will most likely take the price to new all-time highs in the coming weeks.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of last year’s market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLE and XLE will be some of the best performing sector ETFs in June.

In addition, President Biden is pushing forward a $2 Trillion infrastructure plan, in order to rebuild, reshape and increase the US industrial, transportation and economic output. This is going to benefit companies like Chevron tremendously, as the more heavy construction and transportation there is, the more oil is being used, which will be a great long term growth catalyst for the stock as well.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19 mutations and resurgence of new cases, Biden’s struggle to pass on the funding bills that he promised that he will deliver, the state and pace of the economic recovery, the post-Brexit economic reality for the UK and EU, as well as the serious pick up in commodity and real estate inflation in the US. These factors might lead to a sideways and choppy price action in the coming months. However, our analysis shows that the winners would most likely continue to win in the stock market. Despite the fact that, DVN has already appreciated with over 400% since last November, we are strong believers in the future growth prospects of the stock and we are seeing the $25-27 region as a great long-term accumulation zone for the stock.

Additionally, we are seeing DVN as a great way of playing the reopening of the economy in a rather safe and defensive manner. An intelligent investor should never “bet” against the US government and vice verse an intelligent investor should always look for investing themes that are supported by the current monetary and fiscal policy of the US government and the Federal Reserve. The expected short-term price corrections in DVN should be treated as a great opportunity to buy into this strong performing part of the market at a discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a DVN’s daily chart (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already started the process of retracing from their overbought conditions and are expected to start moving higher again in the coming weeks. In addition to that, it is important to note the fact that the XLE and the Energy sector as a whole would continue to attract a lot of the investors’ attention moving forward, as Energy companies will be the primary beneficiaries of the reopening theme in the economy as the fact that people are eager to start traveling again, will inevitably lead to extremely high demand for Oil in the coming months. Additionally, the huge Infrastructure bill that will be passed in the coming months will also help all cyclical stocks as the broad economic activity will be heavily stimulated.

This makes us optimistic for the future performance of DVN as a meaningful part of the XLE ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of DVN with the large number of growth-related initiatives, the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy the stock at a relatively low discount of just 3% from the 52-week highs, we would like to point out that buying at these levels would be more suitable for risk-oriented investors while risk-averse investors should wait either for a clear break above the $32 resistance or for a correction down towards the $27-28 before jumping in on the Long side. Thus, we are currently looking at the $25-27 range as a great accumulation zone for the stock. Our take profit levels in the coming months are going to be $36 and $40 respectively.

3M (MMM)

Company Background

The 3M Company is an American multinational conglomerate founded back in 1902 in St. Paul, MN and operating in the fields of industry, worker safety, US health care, and consumer goods.

The company has an extremely broad portfolio of products as it produces over 60,000 different products and sells them under several brands and categories, including adhesives, abrasives, laminates, passive fire protection, personal protective equipment, window films, paint protection films, dental and orthodontic products, electrical and electronic connecting and insulating materials, medical products, car-care products, electronic circuits, healthcare software and optical films.

The company has four major business segments:

Safety & Industrial – In this segment the company serves customers in the electrical, safety and industrial markets across the globe. It also includes industrial adhesives and tapes, personal safety, abrasives, closure and masking systems, roofing granules, electrical materials and automotive aftermarket businesses.

Transportation & Electronics – Here the company primarily serves original equipment manufacturers (OEMs) in the electronics and transportation industries across the globe. The segment includes electronics, commercial solutions, advanced materials, transportation safety, automotive and aerospace, and other related businesses.

Health Care – Through this segment, 3M leaves its footprint in the healthcare industry by serving a large number of healthcare developers, providers and innovators. Businesses within the segment are oral care, medical solutions, food safety, separation and purification sciences, and health information systems businesses.

Consumer segment – It provides office supply, stationery, home improvement products, homecare products and consumer healthcare products.

Current position – Financial Performance & Future Growth Prospects

3M is well-positioned to benefit from the wide span of its product portfolio as most of its products are expected to perform better in a non-lockdown environment. Furthermore, the company has been putting a lot work into new marketing activities as well as new shareholder-friendly policies, which will also materialize in the quarters ahead. In Q1 2021, the company’s earnings and sales surpassed estimates by 22% and 5%, respectively. Demand for respirators due to the pandemic was a key growth driver as it boosted sales by $190 million. For 2021, 3M reiterated its projections, with year-over-year net sales growth of 5-8%. Organic sales are predicted to increase 3-6%, whereas adjusted earnings are expected to be $9.20-$9.70.

As a manufacturer and supplier of products used in industries like semiconductor products, construction, home improvement, automotive, electronics and data center, 3M is really well positioned to benefit in many different ways from the full reopening of the economy, as many of these sectors and industries are expected to flourish in the Q2 and Q3.

A key long-term goal for 3M remains to continue to increase its business impact across multiple industries, by constantly solidifying and improving its product-portfolio solidification. Some of the company’s household products like Nexcare, Post-it, Scotch, Scotch-Brite and Scotchgard are market leaders in their individual categories, which poises well for the company’s future business prospects. Furthermore, the senior management of the company clearly understands the fact that building the right portfolio of products through consistent innovation as well as strengthening company culture and taking care of both its clients and employees translates into higher profit margins in the long-run. In addition, 3M is also working actively on improving its marketing capabilities by investing in global programs, using multiple digital platforms. The multifaceted business profile of 3M with access to some of the fastest-growing industries out there like home improvement, healthcare, e-commerce, automotive electrification and personal safety arenas will definitely help the company to continue to deliver great returns for its shareholders.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 15 months taking the price from the March 23rdlows in 2020 of around $120 to the $207 52-week highs in the beginning of May, 2021. This represented a great 89.2% gain for the stock in less than a year. However, we need to remember that the Industrial sector altogether was heavily beaten down during the pandemic and despite the 89.2% appreciation of the stock price, MMM still hasn’t managed to break its all-time high levels of $232 per share. The road to the current 52-week highs was not easy as well as it was filled with many different hurdles that the bulls had to overcome in order to keep pushing the price higher. The 2nd wave of the virus last Fall ended up pressuring again the Industrial space heavily as all countries out there were following strict lock-down policies and no one was allowed to basically move. Factories were shut, production lines were stopped and supply chains were disrupted.

However, with the increased rapid vaccine development and distribution back at the end of the Fall last year it seemed that we are slowly getting out of the woods and MMM clearly benefited from that. There were few massive 10% corrective movements that took place during the strong uptrend that the stock has been moving within, but the uptrend remained intact on all occasions. The stock has regained its popularity as after all it remains one of the leaders in the Industrial Diversified Operations segment. The way that 3M has evolved into a technology conglomerate with e remarkable portfolio of essential technology products used across various different industries has allowed the company to truly diversify its revenue streams, which has respectively lowered the volatility in the stock and has brought a lot of investors back into it. The stock is now a go-to choice for both small retail and large institutional investors looking to add some stable cyclical Industrial exposure to their portfolios at a fair price.

We will start buying the stock at around $201, right above the first strong support at $200. If the price drops further in the short-term we would be buying more at the next support at $190. Our initial profit-taking target is set at $250, followed by the next target at $275 where we would be fully cashing in our profits.

The stock is currently sitting at $202 per share, which is just below its 52-week highs of $207 per share. We are seeing that the stock has continued to find a lot of buying interest along the upward sloping 20 DMA, as it seems that the stock is in the process of accumulating a lot of bullish momentum, which will end up helping it to break above the resistance lying at $210. Such a break would be a very good sign for the bulls, as it would clear the path up towards the $235 and $250 marks. The confluence of the horizontal, diagonal, 20 DMA, 50 DMA and 100 DMA dynamic support lines is currently spanned across the $190-200 area, which is expected to continue to bring a lot of buyers back to the market every time the price drops there. The stock has been rallying strongly ever since we saw the initial round of the rotation from growth into more cyclical and value oriented stocks back in February. The stock has moved up with more than 20% since then, which really shows that there is a lot of momentum behind that uptrend. The company reported better-than-expected Q1 financial performance results, surpassing the consensus estimates on both the top and bottom line.

The most recent rejection from the $210 intermediate resistance, shows that there might be some profit taking ahead in the stock, after the strong push higher that we have seen in the last few weeks.

However, the $195-200 range should be viewed by investors as a great opportunity to buy into one of the cyclical industrial leaders at a discount and at a relatively fair P/E valuation. The failure of the price to break below the $190 support back in April and the subsequent sharp price appreciation could be taken as a signal for the presence of strong bullish interest around the above-mentioned support levels. This in turn confirms that the long-term uptrend is still intact and that the next bullish run will most likely take the price to new all-time highs in the next few months.

Furthermore, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of last year’s market favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLI and XLE will be some of the best performing sector ETFs in June.

In addition, President Biden is pushing forward a $2 Trillion infrastructure plan, in order to rebuild, reshape and increase the US industrial, transportation and economic output. This is expected to benefit all cyclical and industrial companies. Furthermore, with people going back to their normal lives we believe that most of the sub-industries that MMM participates in will see a substantial pick up in consumer demand, which will be a great long term growth catalyst for the stock as well.

We believe that the stock market in the US currently holds a lot of intrinsic risks – COVID-19 mutations and resurgence of new cases, Biden’s struggle to pass on the funding bills that he promised that he will deliver, the state and pace of the economic recovery, the post-Brexit economic reality for the UK and EU, as well as the serious pick up in commodity and real estate inflation in the US. These factors might lead to a sideways and choppy price action in the coming months. However, our analysis shows that some of the Fundamental winners out there would indeed be the industrial and energy stocks. Despite the fact that, MMM has already appreciated with over 89% in the last year, we are strong believers in the future growth prospects of the stock and we are seeing the $190-200 region as a great long-term accumulation zone for the stock.

Additionally, we are seeing MMM as a great way of playing the reopening of the economy in a rather safe and defensive manner. An intelligent investor should never “bet” against the US government and vice verse an intelligent investor should always look for investing themes that are supported by the current monetary and fiscal policy of the US government and the Federal Reserve. The expected short-term price corrections in MMM should be treated as a great opportunity to buy into this strong performing part of the market at a discount, which would in turn give every investor a chance to maximize his profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a MMM’s daily chart (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have already started the process of retracing from their overbought conditions and are expected to start moving higher again in the coming weeks. In addition to that, it is important to note the fact that the XLI and the Industrial sector as a whole would continue to attract a lot of the investors’ attention moving forward, as Industrial companies like 3M will be among the primary beneficiaries of both the reopening and government spending themes. Additionally, the huge Infrastructure bill that will be passed in the coming months will also help all cyclical stocks as the broad economic activity will be heavily stimulated.

This makes us optimistic for the future performance of MMM as a meaningful part of the XLI ETFs structure. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of MMM, the stock will be able to hold its ground better than some of the other stocks out there in the event of a correction, and it would also outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy the stock at a relatively low discount of just 2% from its 52-week highs, we would like to point out that buying at these levels would be more suitable for risk-oriented investors while risk-averse investors should wait either for a clear break above the $207 resistance or for a correction down towards the $190-200 region before jumping in on the Long side. Thus, we are currently looking at the $195-200 range as a great accumulation zone for the stock. Our take profit levels in the coming months are going to be $250 and $275 respectively.

Sincerely,

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