Dave Nicoski ...
  • Ross LaDuke
EUR 221.58 For Business Accounts Only

Vermilion Compass: Weekly Equity Strategy

Yield surge tests equities; Downgrading Discretionary

Bent, but not broken. That is how we would classify the state of the S&P 500. Recent market weakness has been chalked-up to the 10- and 30-year Treasury yields surging above critical resistance areas - 3.1% and 3.25%, respectively. We have highlighted rising rates numerous times in recent months as having the potential to derail the market's advance, and so far the market has done nothing but go down. However, we must keep in mind that the weakness has come on the heels of all-time highs and the S&P's multi-month uptrend remains intact. We maintain our overall constructive outlook and will monitor for signs of further deterioration.

• Sector Relative Strength Rankings (RSRs) & Weighting Recommendations. We are downgrading Discretionary to market weight as retail (XRT, RTH) breakdowns and continued weakness in homebuilders (XHB, ITB) and major autos (CARZ) - big ticket items associated with long-term financing - has led to price and RS uptrend violations for the Sector. Reduce exposure... see pages 2-3.

• Many major indexes testing support. We cover the S&P 500, Dow Jones Industrials, small-caps (IJR), PHLX Semiconductor, developed (VEA) and emerging (EEM) markets, which are all at logical support areas. In other words, while we expect to see these indexes firm up at current levels based on YTD trends, the potential for breakdowns is not far off... see page 4.

• Big picture trends. Despite the assault on the Discretionary Sector, the cyclicals (XLY) vs. staples (XLP) ratio remains elevated and has not broken down. Something similar can be said of the growth vs. value ratio, where the uptrend remains intact... see page 5.

• In today's report we highlight attractive Groups within Energy, Consumer Staples, Materials, and Utilities... see pages 10-20.
Apache Corp.

Apache is an independent energy company that explores for, develops, and produces natural gas, crude oil, and natural gas liquids. The company had exploration and production operations in three geographic areas: the U.S., Egypt, and offshore the U.K. in the North Sea. The company also has exploration interests in Suriname.

Atmos Energy Corp.

Atmos Energy is engaged in the regulated natural gas distribution and pipeline and storage businesses. The company delivers natural gas through regulated sales and transportation arrangements to residential, commercial, public-authority and industrial customers located primarily in the South. The company also operates intrastate pipelines in Texas. The company operates through the following segments: distribution, which is primarily comprised of its regulated natural gas distribution and related sales operations; and pipeline and storage, which consists of the pipeline and storage operations of its Atmos Pipeline-Texas division and its natural gas transmission operations in Louisiana.


CF Industries Holdings

CF Industries Holdings is a global fertilizer and chemical company. The company's reportable segments consist of the following segments: ammonia, which produces anhydrous ammonia; granular urea, which produces granular urea that is produced from ammonia and carbon dioxide; urea ammonium nitrate solution (UAN), which produces UAN, a liquid fertilizer product; ammonium nitrate (AN), which produces AN that is used as nitrogen fertilizer and is also used by industrial customers for commercial explosives and blasting systems; and Other, which includes the following products diesel exhaust fluid, urea liquor, nitric acid, as well as compound fertilizer products.

Cimarex Energy Co.

Cimarex Energy is an independent oil and gas exploration and production company. The company's operations are mainly located in Oklahoma, Texas, and New Mexico. The company's operations are focused in two main areas: the Permian Basin and the Mid-Continent. The company's Permian Basin region encompasses west Texas and southeast New Mexico. The company's Mid-Continent region consists of Oklahoma and the Texas Panhandle.

CVR Partners LP

CVR Partners owns, operates, and grows its nitrogen fertilizer business. The company produces and distributes nitrogen fertilizer products, which are used by farmers to improve the yield and quality of their crops. The company's main products are ammonia and urea ammonium nitrate (UAN), an aqueous solution of urea and ammonium nitrate used as a fertilizer. The company's products are sold on a wholesale basis. The company produces nitrogen fertilizer products at two manufacturing facilities, which are located in Coffeyville, KS and East Dubuque, IL. The company primarily markets UAN products to agricultural customers and ammonia products to agricultural and industrial customers.

Diamondback Energy

Diamondback Energy is an independent oil and natural gas company focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas. The company's activities are primarily focused on horizontal development of the Spraberry and Wolfcamp formations of the Midland Basin and the Wolfcamp and Bone Spring formations of the Delaware Basin, both of which are part of the larger Permian Basin in West Texas and New Mexico.

Energen Corp.

Energen is an oil and natural gas exploration and production company engaged in the exploration, development and production of oil, natural gas liquids and natural gas. The company's operations are conducted through its subsidiary, Energen Resources Corporation and primarily occur within the Midland Basin, the Delaware Basin and the Central Basin Platform areas of the Permian Basin in west Texas and New Mexico. The company's operations focus on increasing production and adding proved reserves through the development of oil, natural gas liquids and natural gas properties. In addition, the company explores for and develops new reservoirs, primarily in areas in which it has an operating presence.

Entergy Corp.

Entergy is a holding company. Through its subsidiaries, the company is an integrated energy company engaged mainly in electric power production and retail distribution operations. The company owns and operates power plants. The company operates through two segments: Utility, which generates, transmits, distributes and sells electric power to retail and wholesale customers in Arkansas, Louisiana, Mississippi, and Texas; and Entergy Wholesale Commodities, which includes the ownership, operation, and decommissioning of nuclear power plants, located in the northern U.S., the sale of the electric power produced by its operating plants to wholesale customers, and also provides operations and management services.

ICL-Israel Chemicals Ltd.

Lamb Weston Holdings

Lamb Weston Holdings is a producer, distributor, and marketer of frozen potato products. French fries represent the majority of the company's frozen potato product portfolio. The company's segments include: Global, which includes branded and private label frozen potato products sold in North America and international markets; Foodservice, which includes branded and private label frozen potato products sold throughout the U.S. and Canada; Retail, which includes consumer facing retail branded and private label frozen potato products sold primarily to grocery, mass merchants, club, and specialty retailers; and Other, which includes the company's vegetable and dairy businesses.

Lancaster Colony Corp.

Lancaster Colony is a manufacturer and marketer of food products for the retail and foodservice channels. Within its Retail segment, the primary food products the company manufactures and sells include: frozen garlic breads; frozen Parkerhouse style yeast rolls and dinner rolls; salad dressings; vegetable dips and fruit dips; flatbread wraps and pizza crusts; sprouted grain bakery products; salad dressings; and croutons and salad toppings. Within its Foodservice segment, the primary food products the company manufactures and sells include: salad dressings; frozen garlic breads; frozen Parkerhouse style yeast rolls and dinner rolls; and frozen pasta.

Marathon Oil Corp.

Marathon Oil is an independent exploration and production company focused on the U.S. resource plays with operations in the U.S., Europe and Africa. The company's U.S. segment explores for, produces and markets crude oil and condensate, natural gas liquids (NGLs) and natural gas in the U.S. The company's International segment explores for, produces and markets crude oil and condensate, NGLs and natural gas outside of the U.S. and produces and markets products manufactured from natural gas, such as liquefied natural gas and methanol, in Equatorial Guinea (E.G.). The company is engaged in oil and gas development and production across its international locations primarily in E.G. and the U.K.

Mosaic Company

Mosaic is a producer and marketer of concentrated phosphate and potash crop nutrients. The company is organized into three reportable business segments: Phosphates, which owns and operates mines and production facilities in Florida that produce concentrated phosphate crop nutrients and phosphate-based animal feed ingredients, and processing plants in Louisiana that produce concentrated phosphate crop nutrients; Potash, which mines and processes potash in Canada and the U.S. and sells potash in North America and internationally; and Mosaic Fertilizantes, which produces and sells concentrated phosphates crop nutrients, phosphate-based animal feed ingredients and potash fertilizer.

Murphy Oil Corp.

Murphy Oil is a holding company. Through its subsidiaries, the company is an oil and gas exploration and production company. The company explores for and produces crude oil, natural gas and natural gas liquids worldwide. The company's principal exploration and production activities are conducted in the U.S. by wholly owned Murphy Exploration & Production Company - USA, in Malaysia, Australia, Brunei, Mexico and Vietnam by wholly owned Murphy Exploration & Production Company - International and its subsidiaries, and in Western Canada and offshore Eastern Canada by wholly-owned Murphy Oil Company Ltd. and its subsidiaries. The company's hydrocarbon production is in the U.S., Canada, Malaysia and Brunei.

OGE Energy Corp.

OGE Energy is a holding company. Through its subsidiaries, the company is an energy and energy services provider providing physical delivery and related services for both electricity and natural gas primarily in the south central U.S. The company conducts these activities through two business segments: electric utility, which generates, transmits, distributes and sells electric energy in Oklahoma and western Arkansas; and natural gas midstream operations, which consist of the company's investment in Enable Midstream Partners, LP that involves in the business of gathering, processing, transporting and storing natural gas.

Parsley Energy

Parsley Energy is a holding company. Through its subsidiaries, the company is an independent oil and natural gas company focused on the acquisition, development, exploration and production of unconventional oil and natural gas properties in the Permian Basin. The Permian Basin is located in West Texas and southeastern New Mexico. The company's properties are located in two sub areas of the Permian Basin, the Midland and Delaware Basins, where the company focuses on horizontal development drilling.

Post Holdings

Post Holdings is a consumer packaged goods holding company. The company operates in five segments: Post Consumer Brands segment, which manufactures, markets and sells branded and private label ready-to-eat (RTE) cereal and hot cereal products; Weetabix, which primarily markets and distributes branded and private label RTE cereal products; Refrigerated Food, which produces and/or distributes egg products, sausage, side dishes, cheese and other refrigerated products; Active Nutrition, which markets and distributes beverages, bars, powders and other nutritional supplements; and Private Brands, which manufactures and distributes private label peanut and other nut butters, dried fruit and nuts.

Vistra Energy

Vistra Energy operates an integrated retail and generation business in markets throughout the U.S. Through its subsidiaries, the company is engaged in electricity market activities, including electricity generation, wholesale energy sales and purchases, commodity risk management and retail sales of electricity. The company has six segments: Retail, ERCOT, PJM, NY/NE (comprising NYISO and ISO-NE), MISO and Asset Closure. The Retail segment is engaged in retail sales of electricity and related services. The ERCOT, PJM, NY/NE and MISO segments are engaged in electricity generation, among others. The Asset Closure segment is engaged in the decommissioning and reclamation of retired plants and mines.

WPX Energy

WPX Energy is an independent oil and natural gas exploration and production company engaged in the exploitation and development of long-life unconventional properties. The company is focused on exploiting, developing and growing its oil positions in the Delaware Basin (a subset of the Permian Basin) in Texas and New Mexico and the Williston Basin in North Dakota.

Vermilion Research
Vermilion Research

Vermilion Research delivers timely, actionable, and unique research inputs to professional investors. Our research strategists highlight securities which we believe are at major inflection points, based on our various proprietary technical indicators, and offer asymmetric risk/return profiles. We believe our research methodology, which is not limited by industry sector or market capitalization, enables us to deliver superior investment recommendations.

Our process begins by organizing all actively traded stocks into coherent sectors, then into logical industry groups. We then apply our proprietary relative strength tools to identify developing price trends. Once attractive trends are identified within a selected sectors or groups, we screen for individual stocks which we believe offer the best risk/reward profile. Vermilion offers U.S. and global equity market research products. Vermilion’s research team, which has received numerous awards and accolades, has a combined 70 year of experience in the analysis of investment securities.

Dave Nicoski

Ross LaDuke

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