The bull market has lifted many stocks by double digit amounts over the past three months. However, the gains have been far from even across all industry sectors.
Some sectors, such as health care and financial services, have been red hot, while energy and telecom services have seen more muted gains. According to Bloomberg, the U.S. energy sector has seen a 9 percent loss over the past three months; the worst performance of all sectors.
Although no one can say for sure the direction that oil prices will take, oil refining stocks have historically done well during periods of economic expansion. Perhaps oil refiners represent an undiscovered investing gem in the U.S. market?
[See: The Best Energy Stocks to Buy for 2017.]
We used the Recognia Strategy Builder to search for large-capitalization U.S. oil refining stocks looking well valued due to recent underperformance.
We began by setting a minimum market cap threshold of $5 billion to focus on larger, more established companies in the sector. Next, to find refining stocks that appear to be well valued in today’s market, we filtered for a forward price-earnings ratio of 25 or less. Forward P/E uses analyst projections of future earnings rather than historical data.
To focus on refiners with efficient operations, we will also filtered for companies with return of equity of 5 percent or more. Return on equity shows us how effectively a company’s management has used invested capital to generate income. Companies with higher return on equity ratios are preferred. Last, with U.S. interest rates on the rise, we wanted to avoid companies that are carrying a lot of debt on their balance sheet. We screened for companies with debt to equity ratios of 1.5 or less. Here’s what we found:
Valero Energy Corp. (ticker: VLO). Topping the list is Valero Energy, a Fortune 500 company and the world’s largest independent oil refiner. Valero has refining operations in the U.S., Canada, the U.K. and the Caribbean, and also has a large ethanol production operation. On Jan. 31, Valero reported fourth-quarter earnings that beat analyst expectations handily for both revenue and earnings. With a very low debt to equity ratio of just 0.40, a strong return on equity of 11 percent and a 3.6 percent dividend, Valero looks like a strong prospect for patient investors.
Tesoro Corp (TSO). San Antonio-based Tesoro is an independent refiner and marketer of gasoline and other petroleum products. In addition to seven refineries located in the western U.S. Tesoro also operates a network of over 2,200 retail gas stations in the U.S. under the Tesoro, Royal Dutch Shell ( RDS.A) and Exxon Mobil Corp. ( XOM) brands. Tesoro has the highest return on equity on our list at 14 percent and also has a very low forward P/E ratio of 16.6.
[See: 10 Ways to Buy Industrial Stocks.]
Phillips 66 (PSX). Phillips is the largest company on our list with a market cap exceeding $41 billion. Phillips 66 was formed by the spin off of the downstream assets of ConocoPhillips in 2012. The company ranks No. 30 on the Fortune 500 list. Phillips has had a terrible start to 2017, with its stock price down more than 9 percent for the year. Looking longer term, the stock is down about 11 percent in the past year. The weakness in Phillips’ stock price has now driven its dividend yield to multi-year highs, now standing at 3.2 percent. With a network of 13 refineries in the U.S., some analysts now feel that current conditions have left this stock undervalued and a good buying opportunity for value-focused investors.
Marathon Petroleum Corp. (MPC). In sharp contrast to Phillips is Marathon Petroleum. In addition to operating a chain of refineries in the U.S. Midwest, Marathon also owns and the Speedway chain of retail gas stations. After issuing strong earnings at the start of February, the stock price has jumped almost 7 percent and is now up 32.4 percent in the past year. In spite of its strong price performance, the stock is still looking reasonably valued with a forward P/E of 23.5 and return on equity of 8.8 percent. Marathon also boasts a 2.8 percent dividend yield, making it ideal for long-term value focused investors.
[See: 7 of the Best Cheap Stocks to Buy Under $10.]
Disclosure: The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia in respect of the investment in financial instruments. Investors should conduct further research before investing.
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4 Outstanding Oil Refining Stocks originally appeared on usnews.com
