The energy stocks covered in this article are trading significantly below their 52 week highs and consensus analysts' mean price targets. Furthermore, the stocks have above industry average profit margins even though we are in a period of seeming economic retrenchment.
With the European sovereign debt debacle taking center stage for the past few months energy stocks have suffered as oil dropped below $80 in recent weeks. Nevertheless, it didn't last long once the European embargo of Iranian oil kicked in. I posit we are in for a further upswing in energy prices as Middle Eastern turmoil heats up and emerging market economies gain traction in the second half of 2012.
These five energy companies have above industry average profitability. A company's profitability 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 and earnings information.
Now, simply screening for energy stocks with above average profitability and significant upside potential is only the first step to finding winners that may deliver alpha. In the following sections we will take a closer look at these stocks to determine if the mean price targets are justified.
We will perform a 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.
Devon Energy Corporation (DVN)
Devon is trading well below its consensus estimates and its 52 week high. The company is trading 30% below its 52 week high and 40% below the analysts' consensus mean target price of $81.52 for the company. Devon was trading Tuesday for $58.13, up over 3% for the day.
Fundamentally, Devon has several positives. The company has a forward PE of 10.25. Devon pays a dividend with a yield of 1.38%. Devon's expected EPS growth rate for next year is 30%. The company's profit margins are improving. The current net profit margin is 18.29%.
Devon has 40% upside potential based on its mean target price. The company has tested support at the $55 level twice in the past few weeks. If the stock is able to breach resistance at the 50 day sma and hold above $60 this would be the signal to buy for me. If you have a more conservative outlook, wait until after earnings on August 1st. The stock is a buy.
EOG Resources, Inc. (EOG)
EOG is trading below its consensus estimates and its 52 week high. The company is trading 20% below its 52 week high and has 29% upside potential based on the analysts' consensus mean target price of $122.63 for the company. EOG was trading Tuesday for $95.24 up over 2% for the day.
Fundamentally, EOG has several positives. The company has a forward PE of 16.98. EOG pays a dividend with a yield of 0.71%. EOG's expected EPS growth rate for next five years is 16.41%. The current net profit margin is 11.61%. EOG's strength comes from its growth in sales and EPS. EOG has quarter over quarter sales and EPS growth rates of 48% and 132% respectively. EOG's PEG ratio is 1.22.
EOG has been consolidating at this level for a few weeks. The company has been posting higher highs and higher lows since the start of July. The company just pierced the 50 day sma Tuesday. UBS upgraded the stock from Neutral to Buy June 18th and raised their price target from $115 to $120. This is a strong, conservative, well-run company. I see this as a buying opportunity.
Halliburton Company (HAL)
Halliburton is trading well below its consensus estimates and its 52 week high. The company is trading 22% below its 52 week high and has 32% upside potential based on the analysts' consensus mean target price of $43.19 for the company. Halliburton was trading Tuesday for $29.40, up over 1% for the day.
Fundamentally, Halliburton has some positives. The company has a forward PE of 8.42. Halliburton pays a dividend with a yield of 1.22%. Halliburton's expected EPS growth rate for next five years is 20%. The current net profit margin is 11.87%. Halliburton has quarter over quarter sales and EPS growth rates of 30% and 23% respectively. Halliburton's PEG ratio is .43.
Bernstein upgraded Halliburton to Outperform saying, "Buy quality when there's blood in the streets," adding the deep-water service market should "double from 2011-14 while gas drilling is surging in the Middle East and Asia."
Halliburton is trading at the same level it was during the middle of the BP (BP) fiasco. I know, I bought HAL at $29 and rode it up to $55 for a near double. This is an opportunity to buy low and sell high. They already warned margins were pressured during the last quarter so most of the bad news is priced in to the stock. If you want to play it safe wait until after earnings on July 23rd to start a position.
National Oilwell Varco, Inc. (NOV)
NOV is trading well below its consensus estimates and its 52 week high. The company is trading 22% below its 52 week high and has 34% upside potential based on the analysts' consensus mean target price of $91.09 for the company. NOV was trading Tuesday for $68.14, down almost 1% for the day.
The company has many fundamental positives. NOV has a PEG Ratio of 1, a forward P/E ratio of 10.09 and quarter over quarter EPS and sales growth rates are 47.85% and 36.78% respectively. NOV has a price to book ratio of 1.57.
The stock recently bounced off support at the $60 mark and broke through resistance at the 50 sma at the beginning of July. RBC Capital Markets reiterated their Outperform rating on the stock on July 12th and upped their price target to $75.
The company has beat earnings estimates three quarters in a row. Analysts have recently raised consensus estimates for fiscal years 2012 and 2013. I suggested waiting until the stock breached the 200 day sma in my last article, but with the expectations bar set so low; I am considering taking a flier on this one and starting a position ahead of earnings on July 26th.
Occidental Petroleum Corporation (OXY)
Occidental is trading well below its consensus estimates and its 52 week high. The company is trading 19% below its 52 week high and has 33% upside potential based on the analysts' consensus mean target price of $115.29 for the company. Occidental was trading Tuesday for $86.55, up over 1% for the day.
The company has many fundamental positives. The stock has a robust net profit margin of 26.02%. Occidental has a forward P/E ratio of 10.49 and an EPS growth rate of 11.78% for next five years. Occidental has a PEG ratio of 0.88. Occidental has a price to book ratio of 1.81.
Thursday, Occidental declared $0.54/share quarterly dividend. The dividend yield is 2.6% for shareholders of record on September 10th and payable Oct 15th. The ex-dividend date is September 6th. The 200 day sma has begun sloping upward at the $90 mark. Wait for the stock to confirm the uptrend and breach the 200 day sma to start a position. The company reports earnings on July 26th.
A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.
This is a great quote from Wayne Gretzky. I believe it pertains to the current situation in the energy markets. You have to buy low to sell high. If you only buy stocks when everyone is raving about them you will most likely end up on the wrong side of the trade. All these stocks have strong profitability, solid fundamentals and catalyst to propel them higher, yet they are currently out of favor. This is the formula for finding the proverbial diamonds in the rough.
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 10% at a time on a weekly basis to reduce risk and setting a 5% trailing stop loss order to minimize losses further if you wish.