6 Cheap Energy Stocks To Consider For Big Profits In 2012

by: Efsinvestment

There are primarily two factors that determine energy prices, namely the demand and supply. The demand for energy is highly cyclical, implying that the performance of energy-related stocks goes in par with the overall economic activity. When we look at the supply-side, there are several factors ranging from stability in oil-producing regions to OPEC's production decisions.

I think this year we will experience a growth in energy demand, coupled with a reduction in the supply. What that means for ordinary people is that energy prices will go up. Therefore, I recommend investors consider adding some energy stocks to their portfolio. Investing in energy stocks can be highly profitable, if one can choose the right stock, at the right time, and at the right price. Many well-known investors, such as T. Boone Pickens became billionaires through their energy-related investments. Here is a brief analysis of 6 cheap stocks that contrarian investors might consider for 2012. I have analyzed these stocks from a fundamental perspective, adding my O-Metrix grading system and FED+ valuations where applicable:


Ttm P/E

Forward P/E


EPS Growth Estimate

O-Metrix Score

FED+ Valuation

Apache Corporation







Peabody Energy







Chesapeake Energy







Devon Energy







Hess Corporation







Valero Energy







Apache Corporation (NYSE:APA)

Apache was an underperformer in 2011, but the stock returned near 9% in this year. I think Apache is a pretty cheap stock. It is trading at a trailing P/E ratio of 9.55, and forward P/E ratio of 7.95. The company does not have any significant debt issues. It is also highly profitable with a gross margin of 82%, and a net profit margin of 25%.

(Click charts to expand)

As can be seen above, the stock is highly volatile and not for the faint-hearted. At a price of $98, Apache is trading at the middle of its 52-week trading range. Analysts estimate an annual growth EPS rate of 8.3% for the next 5 years. Based on this estimate, my FED+ fair value range for the company is $155-$224. Thus, I believe Apache has the potential to return huge profits in this year. $100 is a strong resistance point, but Apache looks ready to test and brake this level.

Peabody Energy (BTU)

Peabody is primarily engaged in the exploration, mining, and production of coal. Founded in 1883, the St. Louis-based company owns interests in several coal mines around the globe. Following the double-recession rumors, and slow recovery signs in Europe, Peabody was subject to a massive sell-off in 2011. Between last August and September its market cap was slashed by 50%.

Since reaching its dip of $30 in the last October, Peabody tested this resistance level several times. However, $30 became a pretty strong support level. From a technical perspective, it is obvious that the stock has multiple-buttomed. Analysts estimate an EPS growth of 27% for the next 5 years, which is reasonable, given the 22% EPS growth in the last 5 years. Based on this estimate, my FED+ fair value range suggest that Peabody has the potential to double in 2012.

Chesapeake Energy (NYSE:CHK)

Insiders are extremely bullish on Chesapeake, initiating purchases worth almost $15 million in 2011. However, the stock has gone nowhere in the last year. Since August, the stock lost almost 40%. While the company's debt-to-equity ratio of 0.72 is a red flag for investors, this is not enough to explain the 40% loss in the market cap.

Chesapeake is one of the stocks that has the highest short interests. Approximately 5% of the floating stocks are shorted by the short-sellers. However, the stock started the week with a gain of 6.30%. I think Chesapeake is a great candidate for short squeeze. Based on a growth estimate of 11.30%, my fair value range for the company is between $30 - $51. Therefore, I rate Chesapeake a buy for big profits in 2012.

Devon Energy (NYSE:DVN)

Devon is primarily engaged in the development and production of natural gas and oil in North America. Due to the reduction in natural gas prices, the Oklahoma-based Devon was among the losers of the last year. However, the year-to-date return of 5% is in positive territory.

The company recently announced that it will give up one-third of its interest in 5 separate ventures for $2.2 billion. That could be a great short-term catalyst since an additional profit of $2.2 billion will make this cheap stock look even cheaper. Devon is trading at a trailing P/E ratio of 13.21, and a forward P/E ratio of 9.79. Based on a conservative growth estimate of 4%, my fair value range implies a range of $68 - $120.

Hess Corporation (NYSE:HES)

Hess operates as an integrated energy company that has interests in high-profile oil and gas projects. Morningstar rates the company as a large-value style and offers a five-star rating to the stock based on valuation. The stock is trading at an attractive P/E ratio of 11.07, and forward P/E ratio of 8.87.

The stock was among the losers of the last year, returning -30% to its shareholders. However, it showed signs of recovery, returning 8.5% so far in this year. While the stock was an underperformer, the company was able to boost its earnings by almost 185% in this year. Howard Well has an outperform rating. Analysts' mean target price of $82.68 also implies significant upside potential.

Valero Energy (NYSE:VLO)

Valero Energy is one of the largest independent oil & gas refiners in North America. The company owns and operates several petroleum refineries throughout the U.S., Canada, and Aruba. Established in 1955, the San Antonia-based Valero employs over 20,000 employees.

The profit margins in the refinery business are slim, and Valero is no exception. The company has a net profit margin of only 2%. However, given the sales volume of above $110 billion, Valero was able to report a net income of $2.2 billion in the last 4 quarters. At a price of $23.5, the stock is trading well below its book value. Valero also pays an okay yield of 2.55%.

As I stated before, Valero's balance sheet has near $5 of cash per share. Even if the company makes no profits, it can keep paying the current yield for at least 5-6 more years. The stock is trading at an attractive trailing P/E ratio of 6.02, and forward P/E ratio of 6.61. I think Valero will be an outperformer in this year. Therefore, I rate it as a buy for big profits in 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.