- New Science in old markets -

Tax changes – the effect on Energy stocks

We wrote about the prospects for certain Pharmaceutical stocks in one of the May 1st editions with a promise to examine Energy stocks next. These two sectors have been heavily affected by the 'skew' caused by US tax rules that have led to some American companies accumulating a lot of cash in other countries. As one result there have been a number of tax 'inversion' mergers to release these funds without paying the full tax burden - a manoeuvre that reveals much about the US business sector's view of the world as money is only seen to have value when it is safe at home in America.

It is likely that impending changes to the tax system will lead to increased pressure for mergers in many US sectors but we have concentrated first on Pharma and now on Energy - using our methods to identify some likely targets for acquisition. We are looking for unloved stocks. These are revealed by a bottom extension signal or a return to a compression at a weekly or even monthly scale.

There are three candidates, two of which we already mentioned in the May 2nd edition. The new one is Occidental.

Oil takeover candidates

Chevron is very large with a market cap of $202bn which makes it an unlikely target. It may be a 'good buy' because of the signal shown here but it probably won't 'jump' in price because an ardent suitor shows up.

Phillips is about the right size to be a target with a market cap of $41bn but the support from old compressions is a bit diffuse and the price is merely in a range. It is near the bottom, so can probably be bought here but we don't see it as a clear 'buy'.

Occidental has made the best signal - we know that bottom extensions are the most reliable signal that we have and the company  has a market cap of $47bn, which is not too big to deter a buyer. This would be our pick.

All signals generated by software supplied by our friends at Parallax Financial Research www.pfr.com