The energy sector has not been spared from the recent sell off in the markets. Energy stocks have been taken to the woodshed, so to speak, in recent weeks. Oil prices fell Tuesday as a potential deal between the U.N. nuclear watchdog and Iran on Tehran's nuclear program eased fears of oil supply disruptions, while the eurozone debt crisis continued to threaten economic growth. According to a Reuters report out late Tuesday:
International Atomic Energy Agency (IAEA) Director General Yukiya Amano said he expected to sign a deal with Iran soon to boost cooperation with the investigation into Tehran's nuclear activity, although differences remained.
Germany dismissed a French-led call for eurozone governments to issue common bonds, cooling hopes a day before a European Union summit that the meeting would produce fresh measures to tackle the region's debt problems.
Oil prices also felt pressure from an Organization for Economic Co-operation and Development (OECD) report warning that failure to contain Europe's crisis could derail fragile global growth led by Japan and the United States.
The expectation of a global meltdown coupled with cooler heads prevailing in the Middle East has led to a sell off of energy stocks. The only problem with this scenario is these types of developments never seem to last long. Any time there is a significant dip in the share prices of fundamentally strong energy companies; I see it as a potential buying opportunity. The following five energy stocks may present such an opportunity.
First, these five companies are trading well below their consensus estimates and 52 week highs. The companies are trading on average 37% below their 52 week highs and 52% below their consensus analysts' mean target prices.
Second, these stocks have an average Relative Strength Index (RSI) of 34 which indicates the stocks are approaching oversold territory. The RSI indicator is a technical analysis indicator used to measure momentum on a scale of zero to 100. Stocks are considered to be oversold if the RSI reading reaches 30.
Finally, these stocks have some very positive fundamentals and a few just recently beat analysts' estimates regarding earnings and guidance. All five have PEG ratios of less than one, which is considered extremely undervalued. Now, simply screening for S&P 500 stocks trading significantly below consensus and 52 week highs with a low RSI and some strong fundamental data is only the first step to finding winners that may provide alpha.
In the following sections, we will take a closer look at these stocks to determine if the mean target prices are justified. We will perform a brief review of the fundamental and technical state of each company. Additionally, we will discern if any upside potential exists based on sector, industry or company specific catalyst. The following table depicts summary statistics and Tuesday's performance for the stocks.
CONSOL Energy Inc. (CNX)
CONSOL is trading well below its consensus estimates and its 52 week high. The company is trading 45% below its 52 week high and 53% below the analysts' consensus mean target price of $45.57 for the company. CONSOL closed Tuesday at $29.85, down nearly 2% for the day. CONSOL has many fundamental positives. The company is trading at less than two times book value, has a PEG ratio of .67 and a forward PE of 12.28. CONSOL pays a dividend with a 1.68% yield with a payout ratio of 19%. CONSOL's RSI is 35.17.
The sell off of CONSOL is a case of the baby being thrown out with the bathwater. The Patriot Coal (PCX) customer default news combined with the never-ending negative headlines coming out of the eurozone has exacerbated the sell off of CONSOL. Sterne Agee & Leach recently stated,
Certainly, the equity sell off has been indiscriminant for the most part, not fully reflecting quality, liquidity and product mix differentials. Despite an accelerated risk-off trade, recent data are encouraging. Shares appear under priced and reflect a much more onerous thermal and met-coal pricing scenario.
The stock looks good here. I would layer into the stock 10% at a time using weekly intervals to reduce risk. The coal sector is currently under severe pressure.
Denbury Resources Inc. (DNR)
Denbury is trading well below its consensus estimates and its 52 week high. The company is trading 30% below its 52 week high and 67% below the analysts' consensus mean target price of $25.91 for the company. Denbury closed Tuesday at $15.55, down slightly over 1% for the day. Denbury has many fundamental positives. The company is trading slightly over book value, has a PEG ratio of .40 and a forward PE of 9.09. Denbury's projected EPS growth rate over the next five years is 23.08%. The company is highly profitable with nearly 30% of revenues going to the bottom line. Denbury's RSI is 33.04.
One of Barclays analyst Thomas Driscoll's favorite mid cap oil and gas E&P plays is Denbury. Denbury recently lowered its 2012 production estimate due to recent asset sales. On the other hand, the company bought a Texas oilfield for $360 million in early May which may offset the production loss. I like the company here, but still would layer in to the position over the next two months.
Helmerich & Payne Inc. (HP)
Helmerich is trading well below its consensus estimates and its 52 week high. The company is trading 38% below its 52 week high and 40% below the analysts' consensus mean target price of $63.85 for the company. Helmerich closed Tuesday at $45.56, up slightly less than 1% for the day. Helmerich has many fundamental positives. The company is trading at 1.3 times book value, has a PEG ratio of .78 and a forward PE of 8.56. Helmerich's projected EPS growth rate for 2013 is 50%. The company is highly profitable with nearly 18% of revenues going to the bottom line. Helmerich's RSI is 37.01.
Argus recently upgraded Helmerich on May 17th from Hold to Buy with a $55 price target. Helmerich has strong free cash flow and low debt. Quarter over quarter sales and EPS growth are both up approximately 30%. The stock has recently showed signs of bottoming. I like the stock here.
Murphy Oil Corporation (MUR)
Murphy is trading well below its consensus estimates and its 52 week high. The company is trading 32% below its 52 week high and 41% below the analysts' consensus mean target price of $65.89 for the company. Murphy closed Tuesday at $45.81, down slightly over 1% for the day. Murphy has many fundamental positives. The company is trading at book value, has a PEG ratio of .82 and a forward PE of 7.22. Murphy pays a dividend with a 2.35% yield with a payout ratio of 27%. Murphy's RSI is 29.48.
Murphy is my stock to avoid. Murphy's first-quarter results were disappointing. Murphy missed on liquids volumes by 6% mostly due to shortfalls at its flagship Kikeh property in Malaysia. Additionally, the company lowered full-year 2012 guidance by 3.5%.
Brean Murray, Carret & Co. recently downgraded Murphy Oil to Hold from Buy because the company's first-quarter results highlight ongoing technical difficulties at its key property in Malaysia, while countervailing oily exploration catalysts appear skewed to the second half of 2012. With so many prospective bargains to choose from, there is no reason to stick your neck out on this one. I would avoid Murphy for now.
QEP Resources, Inc. (QEP)
QEP is trading well below its consensus estimates and its 52 week high. The company is trading 40% below its 52 week high and 60% below the analysts' consensus mean target price of $43.04 for the company. QEP closed Tuesday at $26.88, down 1.43% for the day. QEP has many fundamental positives. The company is trading at 1.41 times book value, has a PEG ratio of .81 and a forward PE of 12.39. QEP's projected EPS growth rate over the next five years is 17.21%. The company's current EPS growth rate is over 100%. QEP's RSI is 34.31.
QEP ranks high in regards to profitability compared to the competition. The company has higher profit margins than industry peers at every level. With a higher percentage of revenues hitting the bottom line, QEP is a step above the rest. I like the stock here.
One lesson I've learned is to do the exact opposite of whatever the crowd is doing most of the time. It is a very counter-intuitive thought process to be sure. When a stock is getting shellacked based on macro headlines, but has strong fundamentals and prospects for growth, I now know that is precisely the time to buy rather than sell. It's buy low, sell high, not the other way around. A stock often times hits its lows when a majority of investors have a negative outlook on the company. Sometimes the pullback is justified, as is the case with Murphy. The company has lowered guidance for the year. The risk/reward ratio is currently unfavorable.
These are contrarian speculative picks. Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a weekly basis at a minimum to reduce risk and setting a 5% trailing stop loss order to minimize losses even further.