Devon Energy: A High Performance Stock Now

Apr.10.12 | About: Devon Energy (DVN)

I wouldn't say that bad market news makes me instinctively feel bullish, but there are always winners and losers, and it's great if the things that vex me in my personal life can benefit me in my professional one. I'm grateful for a milder winter here in the mid-Atlantic region as I didn't have to pay as much for oil, but gas prices haven't stopped their steep upward climb. Bad for my car's gas tank, good for my stock portfolio. Devon Energy (DVN) is one of the many oil and gas companies that can still perform well when we're getting not-so-pleasant news. Case in point: the March jobless reports from Gallup.

Odds are you have heard (or will soon read) that these findings showed initially a decrease in unemployment rates, but disappointingly less than expectations. Analysts and non-experts alike see this as a bad sign for the market. It is also well-known that some of the unemployed just gave up looking for work when employment benefits ran out, or were never able to find sufficient full-time work when working for themselves instead of an outside employer. I fall into that second category; caring for a parent with Alzheimer's and needing to work independently, I didn't make it into the statistics that are being reported for 2012.

Anyone who plays the market knows that statistics shouldn't be accepted only at face value, and many suspect unemployment is even worse than reported. That's because human resource experts believe that many firms let go more employees than financially necessary early in the recession, and the hiring that is happening now doesn't represent job creation as much as it's just bringing back those who didn't need to be laid off in the first place. Even setbacks in the market could, I believe, make the oil and gas companies relatively more successful; our nation's needs for these products hasn't lessened and, cynically or not, most investors do see likely value in these holdings.

Devon Energy, focusing on oil and natural gas exploration and production, is one of the firms analysts are watching more closely. A price-to-earnings ratio around 14 and production of 3% of North America's natural gas make it an attractive buy. In 2011 alone, three analysts initiated reviews of Devon, including Deutsche Bank. Other analysts gave a downgrade, but mostly from outperform to market perform; none since mid-July ever moved it to sell.

Suncor Energy (SU), larger and better known, has a slightly lower but still strong earnings multiple. There was an analyst review initiated in 2009 as other major analysts were already following the stock, with a 2012 upgrade to buy. Enterprise Products Partners (EPD), similar in size to Suncor, has a much higher price-to-earnings ratio of around 21. Six new analysts started reviewing Enterprise Products since the start of the recession, and nearly all analysts show an upgrade recommendation.

Canadian Natural Resources (CNQ) is midway in size between Suncor and Enterprise on the high end and Devon Energy on the lower end, with an earnings multiple nearly identical to Devon. One analyst started following Canadian Natural in 2009 as the other big players were already doing so, with a mix of upgrades and downgrades. But there was an upgrade this week by Barclays from Equal Weight to Overweight. Like the others, the downgrades never recommend to sell. Noble Energy (NBL) is the smallest (relatively only) of the stocks I'm looking at, but with the highest price-to-earnings ratio by far of 38. So it makes sense that the major analysts jumped on board by initiating their reviews recently -- five new analysts since January 2011.

The business of analyzing stocks isn't taken lightly, and the heavy hitters don't waste their time adding to their lists unless the holdings are important. Recent news about fracking, Marcellus shale, and environmental concerns has triggered positive feedback with regard to possible new sources of energy, as well as negative feedback based on grassroots protests and legislative battles. All this interest in these oil and gas stocks, combined with the lack of recommendations to sell, signals optimism for Devon Energy, Enterprise Products, and Noble Energy -- and to a slightly lesser extent (due to less new attention by analysts) Suncor and Canadian Natural Resources. These types of stocks are seldom cheap, but the risk-to-reward ratio typically represents the opportunity to have a strong long-term performer.

If and when jobless rates decline in a verifiable and significant way, without an inversely negative indicator concurrently appearing, most stocks will have every reason to experience growth. However this Great Recession has been haunting us since 2008, and although I strongly believe it is taking a hike, I don't think it is hiking very quickly. Oil and gas can still perform well in a recession, and decades of past performance statistics show these names can also do well in a great market; getting in now when not everyone is expecting a great market may be the fate for this industry over others.

So, the unemployment news wasn't good -- to me, that isn't a reason to not buy or to sell to keep from losing more. I am a long-term investor who believes successful investing often includes a nervous market that misses the mark on valuations -- buying on bad news is a real strategy. Combine that with the fact that gas and oil will still be needed and that continued exploration is a given, Devon Energy and its brethren are likely to do well through the end of this recession and hopefully beyond.

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