We recently compiled a list of the 10 Worst Performing Affordable Stocks Under $40. In this article, we are going to take a look at where Kosmos Energy Ltd. (NYSE:KOS) stands against the other worst performing affordable stocks under $40.
How’s the Market Performing after Fed Rate Cuts are Finally Here
The stock market has been anxiously waiting for the interest rate cut news. Analysts had been debating whether the Federal Reserve would make a 25-point or 50-point cut. The wait was finally over with good news for the market.
On September 18, the Federal Reserve Open Market Committee decided to cut the borrowing rates by the higher end of the expectation, which was 50 basis points. The rate cut indicated that inflation is moderating and that the labor market has weakened. This marked the first rate cut since the COVID-19 pandemic.
The decision was not unanimous as Fed Governor Michelle Bowman wanted a quarter-point cut. Moreover, the chairman Jerome Powell called the cuts to be a “recalibration”. One thing that the committee was confident about is the fact that inflation is moving sustainably towards the 2% mark.
Right after the decision the Dow Jones index jumped 375 points and then eased a little as the market digested the news. In one of our recent articles about 10 Worst Affordable Stocks To Buy Right Now, we talked about how Tom Lee, Fundstrat Global Advisors co-founder was confident that the market will perform positively both moving in and out of the announcement. Here’s an excerpt from the article:
“Tom Lee, Fundstrat Global Advisors co-founder, joined CNBC to talk about how the market is expected to perform moving into the fed rate cuts and after the announcement. Lee believes that one of the factors leading to confusion among investors is the election period. The market is expected to stay in a fluctuating environment for the next eight weeks until the elections are over. However, fed rate cuts are coming at a crucial time to give some positive for the market.
There are two main reasons leading up to the rate cuts, one being the inflation easing and the other being the slower labor market that needs help from the Federal Reserve. Moreover, Lee thinks that regardless of the Fed deciding on a 25-point or 50-point cut, the result is going to be positive for the market. He thinks that investors should be confident for the next 12 months as whenever the Fed cuts rates, the win ratio for the markets has been almost 100%. Moreover, the markets rally post-elections regardless of who takes the seat.”
Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School of Business and Wisdom Tree chief economist, recently appeared on CNBC and expressed that he was pleasantly surprised by the Federal Reserve’s decision to make a 50 basis point cut. While talking about how the market is going to perform after the announcement, Professor Siegel said the market is going to be at an all-time high and there are not going to be any fluctuations as we have seen in the past few days.
The word “recalibration” holds significance here, the market has been 100% towards the target unemployment around 80% to 90% towards the inflation target and the Fed hadn’t moved the interest rate. Professor Siegel pointed out that the gap has been growing between the Fed Funds and the market conditions and they were thinking about a single cut by year-end until June. However, the latest announcement mentioned the Fed will cut rates at each meeting making a total of 6 cuts until June of next year. This will bring the Fed Funds rate down 200 basis points to 3.3%, which is where the professor thinks it should be.
Overall, the market and the economy seem to be heading towards a period of growth. The only foreseeable headwind is if the inflation picks up, however, analysts don’t see any signs of inflation picking up; rather they see all major industries doing well especially now that the rates have been cut.
Our Methodology
To compile the list of the 10 worst performing affordable stocks under $40, we used the Finviz stock screener. We first defined criteria to ensure we only got the worst performing affordable stocks. We selected stocks trading below the market average Forward P/E (i.e. 23.79 as per Wall Street Journal), with earnings expected to grow this year, average analyst median price target upside potential of at least 30%, and a year-to-date decline of at least 30%. Moreover, we also ensured that these stocks were trading below $40 and were widely held by institutional investors.
Once the criteria were defined, we then selected 10 stocks that fit our criteria and ranked them in ascending order of the Year-to-Date decline. Please note that all the indicators used to rank the list were recorded on September 18.
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).
A drilling platform in the middle of the ocean, showing the oil and gas exploration process.
Kosmos Energy Ltd. (NYSE:KOS)
Share Price: $4.37
Analyst Upside Potential: 83.07%
Forward P/E Ratio: 5.73
Earnings Growth This Year: 9.70%
Number of Hedge Fund Holders: 25
Year-to-Date Decline: 35.07%
Kosmos Energy Ltd. (NYSE:KOS) is an oil and gas company that focuses on exploring and producing energy from deepwater locations. It has operations in key locations such as Ghana, Equatorial Guinea, the U.S. Gulf of Mexico, Mauritania, and Senegal.
The stock has been down 35.07% on a year-to-date basis, making Kosmos Energy Ltd. (NYSE:KOS) one of the worst performing affordable stocks under $40. However, analysts think otherwise, 8 analysts have a strong Buy rating on the stock, with their 12-month median price target of $8 presenting an upside of 83% from current levels.
So what defines this bullish sentiment from the analysts? Kosmos Energy Ltd. (NYSE:KOS) is one of the stocks that is expected to benefit from higher oil and gas prices as soon as the economy bounces back. Moreover, the company’s financial performance has also been strong as demonstrated by 16.34% year-over-year revenue growth during the second quarter of 2024.
Management aims to increase its production by 50% and the recent quarter results already indicate significant progress. The company has been able to increase its production by 7% year-over-year and produces 62,000 barrels of oil daily.
Moreover, the company also aims to substantially improve its free cash flow generation to a range of $100 million to $150 million each quarter. If management pulls it off, Kosmos Energy Ltd. (NYSE:KOS) will be able to reduce its debt and simultaneously expand its operating ventures. It has recently started production at Winterfell, with the company owning 25.04% interest at the site.
Patient Capital Management stated the following regarding Kosmos Energy Ltd. (NYSE:KOS) in its fourth quarter 2023 investor letter:
“Kosmos Energy Ltd. (NYSE:KOS) declined from the high seen at the end of September following energy prices lower. The company was also hit as they marginally increased CAPEX expectations and hinted at the potential for their first gas delivery out of Tortue being delayed to 2Q24 from 1Q. Kosmos is an exploration and production services company with assets in Africa. The company is differentiated in the Exploration & Production space because of its growth profile (+30% YoY in 2024), long reserve life (>20yrs, nearly double the sector average) and focus on liquified natural gas (LNG). While the market is focused on near-term risk of production delays, we believe it is ignoring the long-term value of the underlying assets. As we move into 2024, production should inflect higher, climbing 30% YoY, while CAPEX comes down, declining 20% YoY. Together this leads to attractive growth and free cash flow generating asset providing the company the ability to pay down their debt and to return capital. At these levels, the company will generate more than its current market cap in FCF over the next 5 years at $90 Brent prices. With the combination of gas-heavy reserves and inflecting cash flow generation, we think Kosmos is significantly undervalued and a potential acquisition target.”
Overall KOS ranks 6th on our list of the worst performing affordable stocks under $40. While we acknowledge the potential of KOS as an investment, 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.
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Disclosure: None. This article is originally published at Insider Monkey.