Energy is a sector that has burned even the savviest of investors over the years. It's easy to see the allure: the U.S. administration's promised major infrastructure spending should boost related industries, and alternative energy generation has shown promise.
But the energy sector is still struggling with oil prices at (or recently below) $50 a barrel, and many investors appear reluctant to hunt for bargains among the beaten-down shares of major energy companies.
The Energy Select Sector SPDR (XLE) is down more than 16% percent this year, while the Standard & Poor's 500 is up more than 10%. That makes energy one of the worst performing sectors in the index, which would suggest there might be some bargains to be found. Energy stocks are just 6% of the S&P, which is more heavily weighted to technology, financials and health care.
With the price of crude appearing to stabilize lately, energy companies can have a better grasp on forecasting their short-term numbers. And a weaker U.S. dollar will boost earnings for companies with sales abroad, which is certainly the case for a lot of energy companies.
People may be steering clear of the sector, on fears about global economic growth. But many analysts have pointed recently to an indicator that shows growth is strong: the price of copper, a material used in manufacturing, is on the rise.
A recent article in Barron's pinned the sector's trouble squarely on U.S. exploration and production companies.
Warren Buffett himself has gotten burned by energy investing in the past -- namely, through his holdings of bonds by the formerly named TXU. But his Berkshire Hathaway (BRK.A) still has a big bet on the sector, through a 15% stake in Phillips 66 (PSX) . He lost out on the $9.0 billion cash offer for Energy Future Holdings Oncor unit, but it shows Buffett's attraction to the energy patch.
Part of the problem is the more than one trillion dollars energy production and exploration companies have ploughed into their operations over the last few years, boosting production and efficiency, but not bottom line results.
Capital spending by exploration and production companies is expected to continue to climb through next year and outstrip cash flow, Barron's said, citing analysts. Spending by big integrated companies like Exxon Mobil (XOM) and Chevron (CVX) is expected to fall, however.
These investments, plus extraction from shale, are boosting production at a time when the oil cartel nations are attempting to put a cap on it to drive inventories lower and boost the price of oil. That is also putting pressure on the shares of large energy companies.
There is a trend for energy to underperform and then rally. Last year, S&P energy stocks were down until the fourth quarter, then the sector rallied to become the best performing sector.
Not surprisingly, a number of the quantitative value models I run are finding value in energy names, both domestic and international, given their low valuations. If oil can stabilize and move higher into the end of the year, I think there are some potential opportunities. The stocks below obtain high scores from the systematic models I run on Validea, which are based the stock-picking methods by investors like Warren Buffett, Peter Lynch and other successful investors.
-- Chevron is a supplier to the growing market for liquefied natural gas, with two big gas fields in Australia. The stock fits the investment style of James O'Shaughnessy, which I extracted from his book, What Works on Wall Street. With a 4% dividend yield and free cash flow of $12.53 a share, Chevron is one of the top 50 ranked stocks using O'Shaughnessy's Cornerstone Value method.
-- Lukoil (LUKOY) , one of Russia's largest oil producers, scores highly based on a value strategy developed using Ken Fisher's Super Stocks methodology. The firm has cash flow per share of $10.68, a hefty 10.3% dividend yield, a low price to sales ratio and 21% debt to equity -- all factors that help it score highly based on the Fisher-inspired screen. Lukoil's production was down slightly in the most recent quarter, but the firm is the world's largest natural gas producer at a time when the cheap energy source is in rising demand.
-- Exxon Mobil shares recently hit a fresh 52-week low. As the XLE's biggest constituent (23%), Exxon shares increasing could lift the sector. The company has free cash flow of $8.06 and the shares have a dividend yield of 4%. The stock scores highly based on both the Cornerstone Value and Fisher Super Stock methods.
Investors who like to buy things when they are on sale and want to get paid to wait while the energy sector turns around may want to consider these three mega-cap energy plays.