With the markets climbing higher, it's getting more difficult to find stocks that are still trading at bargain valuations. However, many undervalued stocks remain if you seek them out. The oil sector offers plenty of long-term promise as the world population grows and emerging market countries begin to consume more oil per capita. Another big reason to focus on oil is due to the considerable amount of money printing that is likely to occur over the next few years. Loose money policies from debt ridden countries will probably lead to inflation in the future. Oil demand is only going to increase over time and recessions don't last forever. Two of the best ways to play the long-term rise in oil prices would be to invest in what might be a couple of the most undervalued oil stocks today:
Chevron (CVX) shares recently dropped from about $108, which was close to the 52-week high of $110.99, to current levels after earnings were released. Long-term investors should be using short-term dips like this as a buying opportunity. This stock appears cheap based on a number of factors, including earnings and the dividend yield. The earnings per share estimate is $12.92 for 2012, and $13.55 for 2013. This puts the PE ratio at just over 6 times forward earnings. The average S&P 500 Index stock trades for over 12 times earnings which is almost twice the multiple for Chevron shares. The average yield for a S&P stock is about 2%. Again, Chevron looks undervalued with a dividend of $3.24 per share, which is equivalent to a 3% yield.
Chevron has a consistent history of enacting 2 for 1 stock splits every several years or so. Chevron last enacted a 2 for 1 split around 9/10/04, when the stock was trading for about $80 per share (pre-split) or about $40 post split. In terms of both the current stock price and the fact that Chevron hasn't split the stock since 2004, a split could be coming soon. Stock splits don't always lead to a higher stock price, but in this case it could be enough for a small boost. With a low PE ratio, a potential stock split on the horizon and a dividend that pays you to wait for higher prices, this stock is a great buy now and on any further weakness.
British Petroleum (BP) is still dealing with the liability and claims that arose from the oil spill in the Gulf of Mexico, and that will continue for awhile. However, the company has done a good job at restoring environmental and financial damage, and the claims have been manageable. BP has been working on mitigating the costs of the oil spill, and it is likely to receive substantial settlements from other companies that had some involvement in the spill. In spite of significant legal expenses, this company has been reporting solid profits. In fact, BP is estimated to earn $6.15 per share in 2011 and $6.53 in 2012. With BP currently trading for about $45 per share, the PE ratio is only about 7 times forward earnings.
BP shares also look undervalued based on a higher than average dividend which is $1.68 per share. This dividend offers a yield of 3.8% which is nearly twice the average for the S&P 500 Index. In a couple of years, the financial impact of the spill should be negligible and the global economy is likely to push oil prices higher. Those two factors could mean significantly higher profits for BP, along with strong gains for the stock price. BP reported $1.63 per share in earnings for the third quarter and the company is expected to announce fourth quarter earnings on February 7, 2012. Many oil stocks have dropped recently after reporting earnings, so it makes sense to buy now and more on any dips.
The data is sourced from Yahoo Finance and Stockcharts.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I am long CVX.