Overview
Each summer for the past two years there has been a big dispute about whether or not to sell in May. Prior to May, the mood of the market always seems to be upbeat. Each year pundits posit rather than a summer swoon there will be a profit boon.
In 2012, the run up in the first quarter was unprecedented. The first quarter was one of the best quarters for stocks in the past 15 years. At the end of March, many were predicting the sell in May and go away phenomenon would not occur. Now, just a few short weeks later we are immersed in negativity and the summer doldrums are upon us. I believe the five energy stocks covered in this article have been unjustly sold off along with the rest of the market and Goldman Sachs analyst Brian Singer agrees.
Singer expects that energy stocks will rebound, stating,
We reiterate our attractive coverage view on E&P stocks following a sharp correction over the last two months. Weak oil prices and global growth concerns have superseded resource announcements, pushing down valuations to levels that now reflect around an $85/bbl long-term price. We believe the pullback in oil prices is overdone (our bullish WTI and Brent forecasts are unchanged) and that a combination of rising oil prices, recognition of improving resource bases, and M&A potential can drive outperformance. We believe liquids growth guidance is conservative, and we see potential for upward revisions to resource life that drive multiple expansion despite the share price trading only modestly higher than it did in 2010 prior to the Eagle Ford Shale/Permian horizontal oil plays being unveiled.
Each year I have written an article detailing the fact that the sell in May phenomenon is real. This year has been no different. The summer months often mark the lows for many stocks. The issue is these lows are often brought on by negative macro headlines rather than fundamental analysis of the underlying stocks. Then, when fall rolls around the macro picture seemingly brightens. Analysts start upgrading beaten down stocks stating the fundamental valuations are compelling. After, the market experience strong bull runs to even higher levels. It comes to pass like clockwork each year. I posit the following energy stocks have been unjustly sold off and present buying opportunities at current levels.
Company Reviews
The five companies covered in this article have an average earnings per share (EPS) growth projection for the next year of over 28%. A company's EPS is conceivably the most important statistic to understand before investing in a stock. Each time you consider starting a position in a stock, you should prudently scrutinize its profitability EPS information. The reason earnings are so vital to investors is that they tell you about the relative profitability of a company. EPS is the most important derivative of profitability for a shareholder.
Additionally, the shares are trading well below their consensus estimates and 52 week highs. The companies are trading on average 38% below their 52 week highs and 44% below their consensus analysts' estimates. These stocks appear undervalued to me. We are in the midst of a sell off based on macroeconomic and geopolitical issues. Often, this is precisely the time to pick up shares in out of favor stocks with strong fundamentals and catalysts for future growth.
Now, simply screening for larger cap S&P 500 stocks with high EPS growth rates and trading significantly below consensus and 52 week highs 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 price is 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.
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Anadarko Petroleum Corporation (APC)
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Anadarko is trading well below its consensus estimates and its 52 week high. The company is trading 27% below its 52 week high and 65% below the analysts' consensus mean target price of $106 for the company. Anadarko closed Tuesday at $64.45, up over 1% for the day. Anadarko has many fundamental positives. The company is trading for 1.55 times book value and has a forward PE of 11.92. Anadarko's EPS growth rate for next year is 31.59% and is projected to be 14.22% over the next five years. Anadarko's RSI is 35.39.
Anadarko Petroleum said an exploration well drilled at its Spartacus prospect in the Gulf of Mexico has turned up dry. The unsuccessful well is a small setback for Anadarko amid a string of major discoveries in the Gulf, an area where the company sees huge potential and plans to drill six to eight exploration and appraisal wells this year.
The stock has been consolidating at the current level for a few weeks. I like the stock here.
Devon Energy Corporation (DVN)
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Devon is trading well below its consensus estimates and its 52 week high. The company is trading 27% below its 52 week high and 42% below the analysts' consensus mean target price of $86.86 for the company. Devon closed Tuesday at $61.15, up over 1% for the day. Devon has many fundamental positives. The company is trading for 1.11 times book value and has a forward PE of 8.83. Devon's EPS growth rate for next year is 29.52%. Devon offers a dividend with a 1.33% yield and a 13.58% payout ratio. Devon's profits margins are robust with 18.29% going to the bottom line. Devon's RSI is 36.02.
During its first quarter earnings call, Devon reiterated double digit growth in liquid natural gas. Devon stated it will increase 2013 oil production by 20%. In fact, Devon's has increased oil production by 26% over last year.
If you review the above chart, Devon has held up well at the $60 dollar range. Four out of five times in the past year it has bounced higher from this level. The stock looks like it forming a base here.
Baker Hughes Incorporated (BHI), Halliburton Company (HAL) and Schlumberger Limited (SLB)
Peak oil is here and most, if not all, of the easy money has been made. Vast reserves still exist such as unconventional shale and deep water plays. Unfortunately, these endeavors are becoming increasingly expense causing a shift of profits from energy explorers to the companies that provide the technology, equipment and know how to reach the black gold. I posit the following energy equipment and service providers are poised to increase profits in the oil patch.
Baker Hughes Incorporated
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Baker is trading well below its consensus estimates and its 52 week high. The company is trading 46% below its 52 week high and 33% below the analysts' consensus mean target price of $57.72 for the company. Baker closed Tuesday at $43.33, up almost 2% for the day. Baker has many fundamental positives. The company is trading for 1.12 times book value and has a forward PE of 9.05. Baker's EPS growth rate for next year is 26.10% and the company has a PEG ratio of .53. Baker offers a dividend with a 1.44% yield and a 15.03% payout ratio. Baker's profits margins are healthy with nearly 10% going to the bottom line. Baker's RSI is 60.64.
Baker Hughes CFO Peter Ragauss says the U.S. oil-directed rig count would need to double to more than 2,500 rigs if analyst estimates of a 2M bbl/day increase in U.S. oil production by 2017 are correct. "A rapid shift to oil production would ultimately favor Baker because of its technology," Ragauss saiod. Baker looks well positioned to execute on this trend. The stock has been trading sideways since late March. I like the level of consolidation. The stock appears undervalued here.
Halliburton Company
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Halliburton is trading well below its consensus estimates and its 52 week high. The company is trading 44% below its 52 week high and 46% below the analysts' consensus mean target price of $47 for the company. Halliburton closed Tuesday at $32.01, up over 2% for the day. Halliburton has many fundamental positives. The company is trading for slightly over two times book value and has a forward PE of 8.08. Halliburton's EPS growth rate for next five years is 25.04% and the company has a PEG ratio of .38. Halliburton offers a dividend with a 1.12% yield and a 10.58% payout ratio. Halliburton's profits margins are healthy with nearly 12% going to the bottom line. Halliburton's RSI is 50.88.
Halliburton is currently at the low end of its trading range for the past year. The stock has significant support here. The risk/reward scenario looks favorable. The stock is a buy at this level.
Schlumberger Limited
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Schlumberger is trading well below its consensus estimates and its 52 week high. The company is trading 29% below its 52 week high and 42% below the analysts' consensus mean target price of $89.20 for the company. Schlumberger closed Tuesday at $67.24, up almost 3% for the day. Schlumberger has many fundamental positives. The company is trading for slightly less than three times book value and has a forward PE of 12.66. Schlumberger's EPS growth rate for next five years is 18.54% and the company has a PEG ratio of .96. Schlumberger offers a dividend with a 1.64% yield and a 27.07% payout ratio. Schlumberger's profits margins are healthy with 12.41% going to the bottom line. Schlumberger's RSI is 46.51.
Some major institutional investors bought up significant amounts of Schlumberger's shares in the first quarter of 2012. Sound Energy added a new $12 million position. Capital Research Global Investors added 6.2 million shares to its 35.5 million share position and Viking Global Investors added a new 3.3 million share position. I don't rely on these types of events to make a decision, nevertheless, when large sophisticated investors are buying shares in stocks I feel are buying opportunities it underpins my thesis somewhat. Schlumberger has held the $65 dollar mark three times in the past year. I like the recent bounce. The stock looks like a buy to me here.
Conclusion
These energy stocks have been sold off hard in recent months. I feel the sell off is overdone. The sell in May and go away phenomenon has only exacerbated the situation. As everyone knows, global oil markets can change on a dime. The EU plans to impose the embargo of Iranian oil on July 1st. I see this event as a catalyst for oil prices. These stocks are a buy at this level.
As always, 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 at least 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.
