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Turnaround Letter
Out-of-Favor Stocks with Real Value

March 16, 2022

We are moving shares of Baker Hughes (BKR) to a Sell. The shares have surged above our previously raised 31 price target (originally 23). Using optimistic yet realistic assumptions, we are hard-pressed to justify a BKR share price meaningfully above the current price.

We are moving shares of Baker Hughes (BKR) to a Sell. The shares have surged above our previously raised 31 price target (originally 23). Using optimistic yet realistic assumptions, we are hard-pressed to justify a BKR share price meaningfully above the current price. And, given the highly cyclical nature of commodity-driven companies and the general lack of secular growth prospects, we see an unfavorable balance of upside potential versus downside risk.

Predicting commodity prices is a low-success-rate endeavor. It does appear, however, that the recent spike to $130+/barrel oil sets the high end of a reasonable price range. New supply, a slowing global economy as interest rates rise, and other balancing pressures are likely to keep oil and domestic natural gas somewhat below their recent peaks. This will, in turn, likely keep demand for Baker Hughes’ products and services somewhat constrained.

In addition, we are not inclined to retain Baker shares on the hopes that capacity constraints will foster meaningfully higher pricing by the company or its two major competitors, Schlumberger and Halliburton.

The BKR recommendation produced an approximately 135% total return since our initial recommendation at 14.53 in our September 2020 edition of the Cabot Turnaround Letter.