We recently listed UBS’s lowest quant stocks in AI, IT, healthcare, and others: 29 stocks across all sectors. In this piece, we’ll take a look at where Occidental Petroleum Corporation (NYSE:OXY) ranks on UBS’s list of lowest quant stocks.
Now that November 2024 has arrived and the US presidential elections are in their final stages, investors are also digesting the results of the latest earnings season. Similar to the first and second quarter earnings seasons, the third quarter also focused on artificial intelligence. While Wall Street’s AI GPU darling, the company whose shares have risen an incredible 206% in the past twelve months, has yet to report its profits, other companies that influence it have started the ball rolling.
Two of these are among the major players in the software segment of the AI industry. The former is known for its close relationship with the company 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. Based on the former, the ability to generate AI profits, mainly through its cloud computing division, is baked into the story.
Since the earnings report, shares are down 4.9%. This is despite the fact that the company’s revenue and earnings per share of $65.59 billion and $3.30 beat analyst expectations of $64.51 billion and $3.10. Along with the profit and revenue growth, the software company’s Azure cloud computing business, which also includes its enterprise AI services, grew 33% year-over-year or 34% at constant exchange rates. These are also better than analyst estimates, so at first glance you would expect the shares to rise.
However, Wall Street isn’t always focused on current performance, and for AI stocks, their stories are based on future expectations. These expectations are priced into the shares. For the software company, weak guidance is at the heart of the poor share price performance, as current quarter revenue expectations of $68.1 billion to $69.1 billion exceeded Wall Street estimates of $69.83 billion by more than half a billion dollar surpassed.
The software company was joined by the social media company to report its earnings on the same day. Shares of the Facebook parent company have also fallen since the earnings report, as they lost 3.3% after recovering from a low of 5.3%. The earnings report, like the stock prices after the report, also reflects the software company’s results to some extent. For starters, the social media company also beat analyst revenue and earnings per share estimates. It posted revenue of $40.59 billion and earnings per share of $6.03, beating analyst estimates of $40.29 billion and $5.25. Driving this trend was increased advertising revenue, which grew 18.7% annually to $39.9 billion.
Although the company’s net income rose 35% to $15.7 billion, this was the slowest growth in more than a year. Additionally, the company reported that it had 3.29 billion active daily users in the third quarter, which was lower than the 3.31 billion estimated by analysts. Another factor that failed to impress investors was AI-driven capital expenditure. The company increased the low end of its full-year capital expenditures from $37 billion to $38 billion and kept the high end intact at $40 billion. Higher expenses increase the returns investors expect and reduce payouts in the form of dividends and share buybacks. As a result, the stock plummeted after the earnings report.
These two AI-driven earnings reports are part of a market now facing lower interest rates, higher growth rates and the culmination of a bitterly fought presidential election. In a recent report, investment bank UBS has an optimistic view of the US stock market. It noted that from a “macro perspective, the combination of slowing but sustainable economic growth, healthy earnings growth and continued Fed rate cuts is supportive.” The bank is also bullish on AI and especially the broader category of companies, apart from the GPU designer that has seen the most share price gains so far.
The report notes that “AI-related companies spanning semiconductors, cloud service providers, appliances and data centers account for more than a third of the S&P 500 by market capitalization. We expect continued growth in AI investment spending to drive sales and profits.” However, according to UBS, AI isn’t the only lucrative stock market sector the US stock market offers. The bank adds that the “S&P 500 also provides exposure to long-term longevity growth through several U.S. medical device companies. Many U.S. companies are also playing a leading role in the energy transition through electric vehicles, renewables and energy efficiency.”
On the topic of rate cuts, the report outlines that “cuts of 50 basis points under similar labor market conditions as today have historically been positive for equities.” These working conditions are determined by the three-month average of US non-farm payrolls, and UBS also believes that interest rate cuts by the Federal Reserve could have an impact on global markets. It notes that “Historically, Fed rate cuts of more than 50 basis points while the market has been within 1% of all-time highs have been rare. It didn’t happen until the Volcker era, in the mid-1980s. The S&P 500 rose more than 20% in the twelve months after the major cuts. In addition, the Fed’s rate cuts generally have a positive resonance on global equity markets, with Asia excluding Japan and emerging markets outside the US being the main beneficiaries.”
Finally, now that the 2024 U.S. presidential election is over, the bank’s report released before the election also comments on outcomes on Wall Street. It advised that “S-elections pose a short-term risk; For example, if former President Donald Trump is elected, markets could quickly price in potential tariffs. However, we view dips as buying opportunities and recommend gradually reducing equity exposure.”
Our Methodology
To compile our list of UBS stocks with improving quantitative indicators, we picked the company’s top stocks that are showing improvements in earnings per share, price-to-earnings ratio, and other indicators. The stocks within each sector were ranked based on the number of hedge funds that purchased the stock in the second quarter of 2024. The sectors themselves were ranked based on the cumulative number of funds invested in the companies, in descending order.
Why are we interested in the stocks that hedge funds invest in? The reason is simple: our research shows that we can outperform the market by imitating the best stock picks from the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating the benchmark by 150 percentage points. (see more details here).
A chart showing the trends and performance of stocks in the public stock markets.
Number of hedge fund investors in the second quarter of 2024: 62
Sector: Energy
Occidental Petroleum Corporation (NYSE:OXY) is a large and diversified oil and gas exploration and production company with a global base of operations. The fact that shares are down 14.7% year to date is not surprising given the weak global oil industry and falling natural gas prices in the US. According to Occidental Petroleum Corporation (NYSE:OXY), the decision to acquire Permian Basin producer CrownRock for a price tag of $12 billion has expanded production at a time when the market has struggled to remain optimistic about global oil demand. The acquisition also increased Occidental Petroleum Corporation’s (NYSE:OXY) debt and forced it to cut back on cash payouts. However, the recovery in oil prices will benefit the company, and a potentially lower rate environment globally could allow Occidental Petroleum Corporation (NYSE:OXY) to take advantage of its higher production and greater economies of scale to earn more margins.
Occidental Petroleum Corporation (NYSE:OXY) management commented on debt reduction plans during its second-quarter 2024 earnings call. This is what they said:
“Since the beginning of the year, we have completed or announced approximately $1 billion in divestitures in the Permian Basin. The proceeds from these sales go directly to debt reduction. This progress on divestitures, combined with robust organic cash flow, supported by our continued focus on operational excellence, has positioned us well to reduce our debt in the near term. Sunil will elaborate on this in more detail, but we are pleased that we are on track to retire approximately $3 billion of debt in the third quarter, meaning this speaks to both the quality of our assets and our future cash flow potential. ”
In short, OXY ranks 29th on our list of UBS’s lowest quant stocks in AI, IT, healthcare and other sectors. While we recognize OXY’s potential as an investment, our belief lies in the belief that AI stocks hold greater promise for delivering higher returns in a shorter time frame. If you’re looking for an AI stock that’s more promising than OXY, but trades at less than five times earnings, check out our report on the cheapest AI stocks.
READ NEXT:8 Best Wide Moat Stocks to Buy Now And The 30 most important AI stocks according to BlackRock
Disclosure: None. This article was originally published on Insider monkey.
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