It makes sense for most investors to have some exposure to the energy sector. Everyone uses energy, whether it is supplied by solar, coal, oil or other companies. Owning stocks in this sector is a great way to participate in the rising demand that comes with an improving economy, as well as global population growth. In addition, energy companies have historically had pricing power and have been able to raise prices in times of inflation.
A recent Bloomberg article has compiled a list of S&P 500 Index stocks that have the most potential for gains. This upside is based on the average analyst price target and the current stock price. The list includes stocks from a wide variety of industries, but the energy stocks are the ones that we will take a closer look at now as they dominate the top of the list due to the high potential for gains:
CONSOL Energy, Inc. (CNX) is a leading producer of coal and natural gas. In terms of coal, this company has more than 4.5 billion tons of proven and probable reserves. The company also has about 3.7 trillion cubic feet of proved natural gas reserves, and it is currently focused on projects in the Marcellus Shale. In spite of a tough environment for natural gas and coal, CONSOL recently reported solid financial results. Earnings for fourth quarter were $196 million, or 85 cents per share, compared to $104 million, 46 cents per share in 2010. These results are impressive and the company was able to counteract weak prices for natural gas and coal through increased production. CONSOL can continue to post solid results because it has hedged about half the natural gas production for 2012, at $5.25 per Mcf. The average analyst target is $52.44 which gives this undervalued stock a potential gain of about 40%.
Here are some key points for CNX:
- Current share price: $37.26
- The 52 week range is $30.56 to $56.32
- Earnings estimates for 2011: $2.71 per share
- Earnings estimates for 2012: $3.20 per share
- Annual dividend: 50 cents per share which yields 1.3%
Alpha Natural Resources (ANR) is one of the largest producers of coal in the United States. This stock is trading way below the 52 week high of $61.66 and now trades for just about $20 per share. Profit margins have been under pressure for coal producers because of lower demand from countries like China, as well as intense competition from fuels like natural gas. Most major utilities generate electricity using both coal and natural gas. When natural gas plunges as it has to current levels, utilities often reduce the amount of coal consumed. This dynamic has led to some excess capacity in coal inventories throughout the industry.
However, many coal companies are cutting output, which could lead to stronger profit margins in the future. Alpha Natural Resources recently announced it would idle a number of mines which is expected to reduce annual coal production by about 4 million tons between now and 2013. It might take time for the effects of the production cuts to be felt in the marketplace, but buying the stock before results improve could be the best way to get in, at what could be the bottom. This stock looks undervalued as it trades for almost half of book value, which is $36.77 per share. The average analyst target is $31.31 which gives this undervalued stock a potential gain of about 54%.
Here are some key points for ANR:
- Current share price: $20.11
- The 52 week range is $15.49 to $61.66
- Earnings estimates for 2011: $1.98 per share
- Earnings estimates for 2012: 84 cents per share
- Annual dividend: none
Halliburton Company (HAL) operates globally and provides products and services to the energy industry. This company is benefiting from the boom in North American shale and it recently reported record results. Revenues for 2011 totaled $24.8 billion which was an increase of 38% from 2010. Net income for 2011 was $3 billion, or $3.26 per share, versus $1.97 per share in 2010. Halliburton shares appear undervalued and trade significantly below the 52 week high of $57.77. The company is facing claims relating to the oil spill in the Gulf of Mexico and this uncertainty could continue unless a settlement is reached with BP. A settlement seems likely to come sooner or later, as other contractors have recently settled. A settlement could lift the cloud of uncertainty and probably add significant upside to the stock. With Halliburton shares trading for just about 7.5 times forward earnings, it has the potential for multiple expansion as well as organic growth as the demand for energy services continues to grow. The average analyst target is $51.19 which gives this oil services stock a potential gain of about 42%.
Here are some key points for HAL:
- Current share price: $36.29
- The 52 week range is $27.21 to $57.77
- Earnings estimates for 2012: $3.92 per share
- Earnings estimates for 2013: $4.55 per share
- Annual dividend: 36 cents per share which yields 1%
Peabody Energy Corporation (BTU) is leading producer of coal. Just like other coal companies, Peabody has been impacted by declining margins. The industry has been hit by concerns over the economic slow-down in China, a mild Winter that has reduced demand for energy, and low natural gas prices which competes with coal as a fuel for major utilities. While these issues can have a short-term impact, they are not likely to last indefinitely. Peabody recently reported strong results, with earnings of $3.76 per share for 2011 per share. Total revenues for 2011 were $7.97 billion as the company sold about 250 million tons of coal. This stock is trading for just about 7 times 2013 earnings and for around half of the 52 week high. Forward looking investors who can look past the short term challenges could be well rewarded for buying while the stock remains depressed. The average analyst target is $50 per share, which gives this undervalued stock a potential gain of about 40%.
Here are some key points for BTU:
- Current share price: $36.14
- The 52 week range is $30.60 to $73.95
- Earnings estimates for 2012: $3.29 per share
- Earnings estimates for 2013: $4.74 per share
- Annual dividend: 34 cents per share which yields .9%
QEP Resources (QEP) has oil and gas projects located in the Rocky Mountain and Midcontinent regions. QEP has high growth potential with projects that include about 89,000 acres in the North Dakota Bakken range, around 49,000 acres in the Haynesville shale range, and others. Oil prices have remained strong and recently started to rise over $100 per barrel. Oil stocks are likely to benefit from the escalating tensions between Iran and many Western countries, and since QEP projects are located in North America, it will not risk supply disruptions or other issues that could occur in the Middle East.
Investor interest in oil stocks is likely to trend higher over time as central bankers around the world print money. Eventually, loose money policies could result in inflation and that is why investors want to own hard assets like gold and oil which can't be created by governments. For 2012, the company estimates it will achieve 12 to 14% organic production growth. The average analyst target is $45.27 per share which gives this solid oil play a potential gain of about 41%.
Here are some key points for QEP:
- Current share price: $32.53
- The 52 week range is $23.56 to $45.20
- Earnings estimates for 2011: $1.64 per share
- Earnings estimates for 2012: $1.93 per share
- Annual dividend: 8 cents per share which yields .2%
Cliffs Natural Resources (CLF) is a major producer of iron ore and coal. In spite of weaker profit margins for coal, this company posted strong results with global iron ore sales volume reaching 40 million tons, which resulted in earnings per share of $11.48 for 2011. The company is actively buying back stock and as of December 31, 2011, it had bought about 4 million shares at an average weighted cost of $72 per share. This represents a value of around $290 million. The company is well positioned financially, and as of Dec. 31, 2011, the company reported about $522 million of cash and cash equivalents on the balance sheet, plus it has no borrowings drawn on a $1.75 billion revolving credit facility. As long as the Chinese economy does not suffer a hard landing, and if the world sees stable but at least slow growth, this stock appears very undervalued at just around 5.5 times forward earnings. The average analyst target is $92.93 per share which gives this coal stock a potential gain of about 40%.
Here are some key points for CLF:
- Current share price: $66.72
- The 52 week range is $47.31 to $102.48
- Earnings estimates for 2011: $9.88 per share
- Earnings estimates for 2012: $11.92 per share
- Annual dividend: $1.12 per share which yields 1.7%
Data is sourced from Yahoo Finance.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.