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To create the list below we looked for oil & gas stocks that appear undervalued relative to EPS trends. Based on the theoretical assumption that if P/E is equal to a constant K, growth in EPS estimates should be matched by proportionate growth in price. When they don't match up, a mispricing may have occurred. We screened for those exhibiting this mismatch between changes in EPS estimate and price.

To give you further confidence, we screened for those with bullish sentiment from institutional investors, with significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to outperform into the future. We've included the top 2 holders of these stocks.

Our final list consisted of 4 stocks.

The List

For an interactive version of this chart, click on the image below. Analyst ratings sourced from Zacks Investment Research.

Do you think these stocks will outperform like hedge funds expect? Use this list as a starting point for your own analysis.

1. Northern Oil and Gas, Inc. (NYSEMKT:NOG): Engages in the acquisition, exploration, development, and production of crude oil and natural gas properties in the Williston basin, the United States.

  • Market cap at $923.91M, most recent closing price at $14.38.
  • Net institutional purchases in the current quarter at 3.4M shares, which represents about 5.86% of the company's float of 58.07M shares. The 2 top holders of the stock are T. Rowe Price, and FMR, LLC.
  • The EPS estimate for the company's current year increased from 1.2 to 1.28 over the last 30 days, an increase of 6.67%. This increase came during a time when the stock price changed by 3.5% (from 14 to 14.49 over the last 30 days).
  • Consider, NOG reported strong earnings growth over the last year, with EPS growing by 76.08%, higher than competitors SeaDrill Limited (EPS growth over the last year at 3.76%) and Cenovus Energy Inc. (EPS growth over the last year at -32.89%).

2. Exterran Holdings, Inc. (NYSE:EXH): Provides operations, maintenance, service, and equipment for oil and natural gas industry.

  • Market cap at $1.77B, most recent closing price at $27.
  • Net institutional purchases in the current quarter at 3.7M shares, which represents about 7.12% of the company's float of 51.94M shares. The 2 top holders of the stock are T.Rowe Price, and Dimensional Fund Advisors.
  • The EPS estimate for the company's current year increased from 0.3 to 0.41 over the last 30 days, an increase of 36.67%. This increase came during a time when the stock price changed by 11.51% (from 24.06 to 26.83 over the last 30 days).
  • The company reported strong earnings growth over the past year, with EPS growing by 68.24%, higher than Schlumberger Limited (EPS growth over the last year at 17.13%) and Halliburton Company (EPS growth over the last year at -14.80%).

3. Compressco Partners, L.P. (NASDAQ:GSJK): Provides wellhead compression-based production enhancement services to natural gas and oil exploration and production companies in the United States, Canada, and Mexico.

  • Market cap at $302.21M, most recent closing price at $19.90.
  • Net institutional purchases in the current quarter at 811.2K shares, which represents about 9.18% of the company's float of 8.84M shares. The 2 top holders of the stock are Oppenheimer Funds, and Raymond James Financial Services.
  • The EPS estimate for the company's current year increased from 1.29 to 1.38 over the last 30 days, an increase of 6.98%. This increase came during a time when the stock price changed by 1.46% (from 19.22 to 19.5 over the last 30 days).
  • This mismatch follows a year of strong earnings growth. Last year EPS grew by 132.63%.

4. Alon USA Energy, Inc. (NYSE:ALJ): Operates as an independent refiner and marketer of petroleum products in south central, southwestern, and western regions of the United States.

  • Market cap at $1.17B, most recent closing price at $19.05.
  • Net institutional purchases in the current quarter at 1.7M shares, which represents about 8.48% of the company's float of 20.05M shares. The 2 top holders of the stock are Dimensional Fund Advisors, and The Vanguard Group.
  • The EPS estimate for the company's current year increased from 1.78 to 1.92 over the last 30 days, an increase of 7.87%. This increase came during a time when the stock price changed by -7.06% (from 19.68 to 18.29 over the last 30 days).
  • The company has reported strong earnings growth over the last year, with EPS growing by 130.51%, higher than competitors Imperial Oil Ltd. (EPS growth over the last year at 12.05%) and Marathon Oil Corporation (EPS growth over the last year at -6.80%).

*EPS data sourced from Yahoo! Finance, all other data sourced from Finviz.

Source: Hedge Funds Are Buying These 4 Small Cap Oil & Gas Stocks Undervalued By EPS Trends