In a development that was little noticed in the U.S., Vadym Skibitsky, described as “Ukraine’s deputy military intelligence chief,” in early January suggested that Russian President Vladimir Putin could be forced out of power within months. Specifically, Skibitsky stated that Russia would launch a huge offensive in the spring, adding, “If Russia loses this time around, then Putin will collapse.” And speculating on Russia’s post-Putin future last October, a former Russian diplomat, Boris Bondarev predicted that the country could descend into “political turbulence” or “chaos” in the wake of Putin’s departure. In such a scenario, Moscow would probably have difficulty sustaining the war. Therefore, it’s a good time to start thinking about which stocks to sell if Russia launches a spring offensive that appears to be failing or if Putin appears to be on his way out.
Unsurprisingly, energy stocks and defense names would be the best stocks to sell in that scenario. Here are three stocks within those sectors to consider unloading or even shorting if the conflict appears to be entering its final stages.
|WMB||The Williams Companies||$31.93|
Most oil and natural gas producers appear to have rather low valuations at this point, as many investors probably realize that the Russia-Ukrainian War has to end sometime and that energy prices would likely drop tremendously when the conflict is finally terminated. However, the valuations of Halliburton (NYSE:HAL), an oil-service company, are not that low.
Indeed, the trailing price-earnings ratio of HAL stock is a rather robust 22, while the shares are trading at five times the company’s book value. Additionally, the shares’ enterprise value/EBITA ratio is nearly 15, which is not very low either.
And if the Russia-Ukraine War ends, triggering much lower oil and natural gas prices, HAL’s top and bottom lines are likely to tumble as energy exploration companies sharply reduce the amount of drilling that they carry out.
Also likely to hurt HAL if peace breaks out in Ukraine is its relatively low dividend yield of 1.15%. To the extent that investors hold onto the shares of companies focused on fossil fuels, most would probably prefer names with low valuations and high dividend yields. Since HAL has the opposite characteristics, its shares are likely to tumble when the war ends.
The Williams Companies (WMB)
The Williams Companies (NYSE:WMB) “owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets.” According to Seeking Alpha columnist Gen Alpha, the bull thesis on WMB stock is based on the company’s ability to benefit from the high demand for U.S. natural gas overseas amid the war in Ukraine.
If the conflict ends, that dynamic will obviously be disrupted, as natural gas in many countries is likely to become much cheaper. As a result, importing the fuel from the U.S. will become less economical, lowering, in turn, the extent to which Williams’ gas infrastructure is utilized in the U.S.
Additionally, Citi on Jan. 18 lowered its rating on WMB stock to “equal weight” from “overweight,” citing valuation and less exuberance surrounding natural gas prices this year compared to 2022.
Northrup Grumman (NOC)
Northrup Grumman (NYSE:NOC) has benefited from supplying its “Bushmaster automatic cannons and midsized ammunition,” along with its “RQ-4 Global Hawk aircraft” to the Ukrainians, The Financial Times reported last summer. If the war winds down, Ukraine’s orders of those products are likely to drop significantly.
Meanwhile, Goldman Sachs last week downgraded NOC stock to “sell” from “neutral.” As reasons for the move, Goldman cited the relatively high valuation of NOC and the possibility of upcoming budget pressures.
The investment bank explained that “Northrop trades at the high-end of its long-term historical valuation range relative to the S&P500, which historically tends to correlate with early stages of defense budget growth and/or an accelerating total defense budget.” Noting that NOC is the “most expensive” large defensive stock covered by Goldman, the bank warned that NOC could be hurt by defense budget cuts by Washington going forward.
Indeed, Congress’s efforts to make budget cuts amid the debt ceiling debate could, meaningfully, negatively affect NOC’s top and bottom lines.
On the date of publication, Larry Ramer did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.