Using Quarter End Window Dressing To Pick Up Cheap Energy Shares: Part 1

 |  Includes: HES, TOT
by: Bret Jensen

The last week of the quarter is one of my favorite investing weeks of the year, especially since I no longer have to manage any money other than my own. It is the time of the year in where beaten down sectors for the quarter bottom as fund managers in an effort to look smart (Which is always easier than being smart) shuck their big losers for the quarter so they don't have to report those positions to investors. This provides a huge advantage to those patient and discipline investors that are willing to step in and add to their positions in losing sectors knowing the new quarter should provide better tidings. The energy sector has been a major loser in the second quarter. Most of my worst positions in the 2nd quarter have been in this industry. Two of my worst calls for the last three months have been with two underperforming E&P concerns. However, they both have very cheap valuations and I have taken the opportunity to average down in the last few trading sessions of the quarter and I look forward to the bounce back that should occur in the third quarter.


Reason for the poor quarter: Other than falling oil prices, the company had a major problem that caused the shutdown of a core offshore platform in the North Sea. Although this accounts for approximately 2% of total production, the stock was hit hard in the market and lost around 20% from its highs in the quarter.

Four reasons TOT will rebound from under $43 a share:

  • The company has a robust balance sheet and yields a robust 6%. The median analysts' price target on Total is $58.50.
  • It is selling at the very bottom of its five year valuation range based on P/B, P/E, P/S and P/CF.
  • It is addressing the problem at its North Sea platform and bringing on new fields in Iraq. It is selling for less than 6 times forward earnings.
  • The stock looks like it is putting in a short term bottom here (see chart).

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(Click to enlarge)

Hess Corporation (NYSE:HES)

Reason for the poor quarter: Hess is probably my worst performing core position in the quarter. I have doubled my position over the last week as I believe it should bounce back from disappointing production in the Bakken, falling earnings estimates and the overall negative sentiment in the energy sector. Its refining business also should benefit from improving spreads. The stock is down around 1/3 for the quarter.

Four reasons HES is a huge bargain at $40 a share.

  • The stock ridiculously below analysts' price targets. The 14 analysts that cover the stock have a median price target of $66.50 a share on the stock, more than 50% above current prices.
  • It is selling at the very bottom of its five year valuation range based on P/B, P/E, P/S and P/CF.
  • Insiders picked up some $4mm in new shares in May during the sell-off.
  • The stock is one of the cheapest in sector at just 71% of book value and under 6 times forward earnings, a huge discount to its five year average (17.3).

Disclosure: I am long HES, TOT.