In spite of a U.S. stock market hovering near all-time highs, the energy sector is one area which has been notably left behind.
With the Standard & Poor’s 500 Energy index down 15.3 percent for the year, the energy sector has underperformed all other U.S. sectors so far this year. In fact, the decline has been so fierce that the energy sector aggregate price-earnings ratio is now just 14 — the second-lowest of all sectors.
The primary cause of this steep decline has been the oversupplied nature of the world oil markets with production exceeding demand in the short term. However, speculation and short-selling has also played a role. U.S. energy stocks may now have declined too far, too fast, resulting in some overlooked bargains that may be attractive to patient, long-term investors.
The screen. We used the Recognia Strategy Builder to search for large-capitalization U.S. energy stocks looking well-valued due to recent declines.
[See: The Best Energy Stocks to Buy for 2017.]
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 P/E ratio of 25 or less. Forward P/E uses analyst projections of future earnings rather than historical data.
To focus on energy stocks with efficient operations, we also filtered for companies with operating margins of 20 percent or more. Operating margin indicates how much profit the company makes on each dollar of revenue. A higher operating margin means that a company is more efficient at turning revenue into profits and has some buffer in the event that oil prices decline further.
With U.S. interest rates on the rise, we also want to avoid companies that are carrying a lot of debt on their balance sheet. We screened for companies with debt-equity ratios of 2.5 or less.
Last, we filtered to select only companies rated “buy” or “strong buy” by the consensus of industry analysts. Here’s what we found.
[See: 7 Ways to Tell if a Stock Is a Good Price.]
Diamondback Energy (ticker: FANG). Diamondback Energy is a Midland, Texas-based oil and gas company focused on production in Texas’ Permian Basin area. Year to date, the stock is down 17 percent, almost all of that coming in the past three months. In early May, the company announced first-quarter results which handily beat analyst estimates for both revenue and earnings. The company also has a debt-equity ratio of 0.21, which is at the low end of what is typical in the industry.
Newfield Exploration Co. (NFX). Newfield is an unconventional oil and natural gas producer focusing on production areas in Oklahoma, North Dakota and Utah. After declining 36 percent this year, NFX stock now has an extremely low forward P/E of 12.9 and operating margin of 20.6 percent.
Cimarex Energy Co. (XEC). Denver-based Cimarex has very efficient operations in Texas, Oklahoma and New Mexico resulting in a strong operating margin of 32 percent. In spite of beating analyst estimates for the last two quarters, the stock has been punished by investors and is down 33 percent for the year. Cimarex expects to grow production by 17 percent in 2017, setting it up for strong earnings in 2018 should oil prices reverse and move higher.
Devon Energy Corp. (DVN). Devon is a Fortune 500 company and the largest company on our list with a market cap of just more than $16 billion. Devon has an accelerating capital investment program and plans to grow production 13 to 17 percent this year and 20 percent next year. The majority of analysts are optimistic on the company, resulting in a consensus analyst rating of “buy.”
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
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4 Overlooked U.S. Energy Stocks to Buy originally appeared on usnews.com
