We recently compiled a list of the Jim Cramer’s Exclusive List of 9 YEV Stocks. In this article, we are going to take a look at where ONEOK, Inc. (NYSE:OKE) stands against the other YEV stocks in Jim Cramer’s exclusive list.
Recently, Jim Cramer sifted through the S&P 500 to identify stocks that satisfy his criteria: yield, earnings growth, and value. He explained the need behind the criteria:
“In a market with huge year-to-date gains, you got to get a little more selective about what you buy. Which is why I created this three-part test, also known as tripartite test.”
To navigate this market, he developed a three-part evaluation framework, which he refers to as the YEV test. Cramer explained that the first criterion focuses on yield, specifically seeking stocks that offer better returns than the current yield on the 10-year Treasury, which sits slightly above 4%. The second criterion is outsized earnings growth, meaning he looks for companies expected to exceed the 14% growth forecast for the S&P 500 next year. Lastly, Cramer seeks value, targeting stocks priced lower than the S&P 500, which currently trades at around 21 times next year’s earnings estimates.
“We want stocks with higher yields than the 10-year Treasury, meaning 4% plus. We want faster earnings growth than the S&P 500. In the aggregate, that’s faster than 14%. And we want a price-earnings multiple lower than that of the overall S&P 500, which trades at 21 times next year’s earnings, which everybody says is a little elevated.”
While Cramer acknowledged that his criteria was challenging to meet, he successfully identified nine stocks that fit the YEV model. He noted that although the Federal Reserve has created a favorable environment for investors, resulting in substantial market gains, it is crucial to exercise caution when selecting stocks.
Observing the historical trends, Cramer pointed out that October has generally been a strong month for the market, yet he reiterated the necessity of being discerning in purchases. He encouraged viewers to consider these nine stocks as the top tier within the market. He went on to emphasize:
“Now, I want you to think of them as the elite of the elite. Not many companies can give you high yields, cheap stocks, and explosive earnings growth all at the same time… Here’s the bottom line: in a market like this one, you do need to be selective, which is why we’ve fallen back on yield, on earnings and on growth and on value. Okay, now these are all things that are very hard to find right now.”
Our Methodology
For this article, we compiled a list of 9 stocks that fit Jim Cramer’s YEV stocks criteria and were unveiled during his episodes of Mad Money from October 7 to October 10. We listed the stocks in ascending order of their hedge fund sentiment as of the second quarter, which was taken from Insider Monkey’s database of more than 900 hedge funds.
Why are we interested in the stocks that hedge funds pile into? 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).
An aerial view of a large natural gas transmission pipeline network in an industrialized landscape.
ONEOK, Inc. (NYSE:OKE)
Number of Hedge Fund Holders: 34
Cramer said that he recommended ONEOK, Inc. (NYSE:OKE) stock previously and likes oil and gas pipeline operators for various reasons, including dependence on volume, limited players in the industry, and great dividend yields.
“What else passed through the YEV test? ONEOK, which is a pipeline play that I absolutely adore. Now, I recommended this one late last year, and it’s up more than 40% since then. I like the oil and gas pipeline operators in general because they’re like toll roads that depend solely on volume, not the underlying price of the commodities in question. Plus, it’s so hard to get regulatory approval to build new pipelines that we’ve got a severe shortage in this country. At the same time, we’re both producing and exporting record levels of oil and gas here, which means more demand for ONEOK.
The other great thing about the pipeline play is that they tend to have terrific dividend yields. Even after ONEOK’s huge run over the past ten months, this thing’s still got a 4.18% yield here, still superior to the tenure. And it’ll get even better as long as long rates come down, which is inevitably what happens when the Federal Reserve cuts short rates. ONEOK also regularly raises its dividend. They target 3% to 4% annual growth for the payout… Unlike most pipeline plays, ONEOK is organized as a traditional C corp, a normal business, and not an MLP or mass limited partnership. And that makes for a cleaner governance structure.”
Cramer noted that the company, which traditionally concentrated on natural gas and natural gas liquids infrastructure, acquired a well-liked company last year, resulting in a more balanced portfolio.
“ONEOK used to exclusively focus on infrastructure for natural gas and natural gas liquids, but then shelled out $18.8 billion for a company we liked very much when we had money, called Magellan Midstream Partners last year. Now they’re more balanced, though still with a natural gas lean. I like that, too, because the big opportunity in energy exports for this country is in LNG, liquified natural gas.
Overall, ONEOK is just another good, solid energy infrastructure play with an outsized payout, which will look even better once rates start inevitably falling again, something I still expect, even as long rates have counterintuitively been kind of creeping up higher since the Fed September meeting. It’s also a great option for someone who wants energy exposure but doesn’t want to gamble on oil and gas prices with a multi-front war happening in the Middle East.”
ONEOK (NYSE:OKE) operates in the essential sectors of gathering, processing, fractionating, storing, transporting, and marketing natural gas and natural gas liquids (NGL) across the United States. The company is currently in the process of acquiring significant assets to strengthen its market presence and increase cash flow, ultimately aiming to provide better returns for investors.
Recently, it announced a series of transactions with Global Infrastructure Partners (GIP), a prominent infrastructure investor. It involves purchasing GIP’s 43% stake in EnLink Midstream for $3 billion in cash, along with acquiring 100% of the managing member interests for an additional $300 million. As per the deal, the valuation of EnLink stood at $14.90 per share.
Additionally, ONEOK (NYSE:OKE) plans to acquire Medallion Midstream from GIP for $2.6 billion in cash. The transactions are expected to be completed in the early part of the fourth quarter. Following the acquisition of GIP’s interest in EnLink, the company intends to pursue acquiring publicly traded shares of EnLink in a tax-efficient manner, specifically through a stock-based acquisition.
These transformative deals are set to establish a comprehensive, large-scale platform in the Permian Basin, significantly boosting the company’s operational footprint in key regions including the midcontinent, North Texas, and Louisiana. The company’s business model will also become more diversified as a result. Post-acquisition, ONEOK (NYSE:OKE) forecasts that 35% of its earnings will stem from natural gas liquids, 29% from gathering and processing, 27% from crude oil and refined products, and 9% from gas pipelines.
With an initial outlay of $5.9 billion for these acquisitions, the company expects immediate positive impacts on its earnings per share and free cash flow. It projects an average annual increase in earnings per share of over 5% from 2025 to 2028, alongside a more than 15% rise in free cash flow per share within the same timeframe. Furthermore, it estimates the potential to realize combined synergies ranging from $250 million to $450 million within three years of finalizing the deals.
Overall OKE ranks 6th on Jim Cramer’s exclusive list of YEV stocks. While we acknowledge the potential of OKE 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 an AI stock that is more promising than OKE but 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.