We recently published a list of 12 Best Young Stocks To Buy and Hold For 10 Years. In this article, we are going to take a look at where Seadrill Limited (NYSE:SDRL) stands against other best young stocks to buy and hold for 10 years.
On January 29, Martín Escobari, the co-president and head of global growth equity at General Atlantic, joined CNBC’s ‘Fast Money’ to discuss the dealmaking and IPO outlook for 2025. He stated that they have been without an IPO market for three and a half years, the longest drought this century. The second longest was 18 months starting in March 2000 after the dotcom bubble. Martín Escobari mentioned that about 3000 companies are waiting to go public, which will create opportunities for growth equity due to pricing for private companies ready to go public but unable to access capital. Historically, he noted that three things are needed for the IPO market to open: at least 18 months of positive market performance, two years remaining, a low and relatively stable VIX, and a handful of IPOs to pop. He said that they bet that it will happen and the IPO market will be back roaring in 2025.
Regarding investor appetite, he expressed excitement about recent AI news and its impact. He noted that all of General Atlantic’s portfolio companies are using AI to cut costs and drive productivity, with a visible ROI. He believes that the next generation of AI is the application layer, with companies creating new services using AI models, proprietary data, and better software after five years of venture bets. He said that General Atlantic just made three major investments in AI and anticipates the next 2 or 3 years to be very exciting on the application layer. When asked about key metrics for companies going public, Escobari emphasized profitability as a key metric. He stated that they want companies going after vast markets, that are profitable, and whose profitability is defensible with a true competitive advantage, not just temporary profits from being a first mover. He believes investors want large markets and the defensibility of profits in addition to profits.
Methodology
We first used the Finviz stock screener to compile a list of the top stocks that went public in the last 3 years and had a 3-year compound annual growth rate of over 15%. We then selected the 12 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q3 2024. The hedge fund data was sourced from Insider Monkey’s database which tracks the moves of over 900 elite money managers.
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).
Drilling rig silhouetted against a setting sun in an offshore location.
Seadrill Limited (NYSE:SDRL)
3-Year CAGR as of February 11: 24.03%
Number of Hedge Fund Holders: 42
Seadrill Limited (NYSE:SDRL) provides offshore contract drilling services to the oil and gas industry globally. It owns and operates drillships, semi-submersible rigs, and jack-up rigs for shallow and ultra-deepwater operations in various environments. It serves major oil companies, national oil companies, and independent oil and gas companies.
Its main business is deepwater drilling. In Q3 2024, it earned $263 million from contract drilling, which was flat year-over-year. The revenue from contract drilling depends on how many of the company’s drillships are working and the daily rate they charge. In Q3, some drillships finished their contracts and were taken out of service, which impacted revenue. However, the Sevan Louisiana drillship continued working at a higher rate, which helped balance things out.
As for 2025, Seadrill Ltd. (NYSE:SDRL) has already secured contracts for 70% of its available drillships. The company expects this number to increase as it secures more deals. Its strategy is to operate the “right rigs in the right regions.” It focuses on drillships that can do multiple tasks at once and are mostly newer, seventh-generation models. The company concentrates its operations in an area called the “Golden Triangle,” which includes the Gulf of Mexico, South America, and West Africa, where most deepwater drilling happens.
Due to a favorable industry structure, increasing demand for deepwater drilling, strong financials, and potential for free cash flow growth and shareholder returns, Patient Capital Management added to its Seadrill Ltd. (NYSE:SDRL) position. It said the following 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 3rd on our list of best young stocks to buy and hold for 10 years. While we acknowledge the growth potential of SDRL, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SDRL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 20 Best AI Stocks To Buy Now and Complete List of 59 AI Companies Under $2 Billion in Market Cap
Disclosure: None. This article is originally published at Insider Monkey.
