Energy stocks have lagged the market by a fairly wide percentage over the past year. As measured by the Energy SPDR (XLE), energy stocks returned 10.64% over the past year — a positive return, sure, but well short of the S&P 500 return over the same time frame of 21.45%. Investor concerns about the current oversupply of natural gas in the United States combined with a very weak global recovery have kept a lid on the prices of many stocks in this sector.
But it’s only a matter of time before the slow, grinding global recovery increases the worldwide demand for oil and gas.
While it is true the U.S. has excess supplies of natural gas, increased usage of gas should reduce the oversupply and lead to a further increase in natural gas prices. Aggressive cost controls and improved efficiencies at oil and gas companies will also lead to improved margins for the industry — and we should see a rebound in the price of these energy stocks.
For investors with a long time frame, many of these energy stocks are attractive at current prices.
Investors who want to capture some of the long-term potential of leading energy stocks should consider using the Graham number along with the Piotroski F-score to identify stocks that are undervalued and have the potential to move a lot higher. A portfolio of energy stocks that are trading cheaply based on earnings and assets that are also showing financial improvement should beat the market over time.
One of the most attractive energy stocks using this method is PHI Incorporated (PHII). While this company does not directly drill for oil and gas, it provides essential services to the companies that do. PHI owns a fleet of aircraft that carry people and equipment to offshore drilling rigs around the world. It also provides aircraft that are used by hospitals and emergency service agencies in 17 states; PHI has 268 helicopters in use, 165 of which are used by the oil services segment of the business.
The stock trades at just 75% of its fair value as determined by the Graham number. The F-score for the company is a perfect 9, as fundamentals and financials are improving across the board for this company.
ConocoPhillips (COP) is one of the world’s largest production and exploration companies and appears to be undervalued at the current price. The company has invested in domestic oil and gas assets to drive future growth, with an emphasis on the Eagle Ford, Bakken and Permian shale fields.
The stock trades at just 80% of its Graham number valuation and has an F-score of 6, so the stock is a buy based on the two measures. Income investors should note that the stock yields 4.1% and has the potential for strong dividend growth in the future.
Energy stocks may have lagged the market over the past year, but there are strong reasons to believe they will catch up and perhaps even lead the market going forward. Buying financially strong companies in the sector at today’s attractive prices should lead to market-beating returns in the future.
At the time of publication, Melvin had no positions in the stocks mentioned.
