Bargain hunters, on the prowl for cheap stocks, like to say: “When there’s blood on the Street, that’s the time to buy.” So, for a bargain hunter like me, common sense suggests follow the blood trail. And, since Oil stocks, in general, are copiously bleeding value, that sector might just be the best place to look. But, in spite of appearances, most oil stocks are not a bargain. With one exception, that is — Chevron (CVX) .
How to Find Bargains in Oil Stocks
Analyzing the various business models and deals in the energy market can be tricky. But, when it comes to bargain hunting, the trick is to focus on the value of tangible assets. Essentially, when you buy an oil stock you’re buying oil wells, rigs, pipelines and other tangible assets. To estimate how much an oil stock might be undervalued, you must first relate how much the stock is undervalued compared to its tangible assets.
CVX Stock Comparatively Undervalued
In order to assess whether a stock is undervalued compared to its peers, one key question must be answered: What is the value of the tangible asset per share versus the stock’s trading price? Below, you can see various oil stocks vs. their actual tangible assets. So, how does CVX stock fare compared to others? CVX stock trades near $86 per share, while its tangible assets are valued at $80 per share.
Let’s examine some other oil stocks such as Exxon Mobile (XOM), Devon Energy (DVN), or even a downstream stock such as Phillips 66 (PSX). Notice that most trade several times above the value of their tangible assets. If you examine CVX stock compared to its peers, CVX barely trades above its tangible asset prices, meaning investors pay practically no premium.
Examining the Quality of Assets
What does it mean if investors are not willing to pay a premium? Perhaps the assets under CVX stock are inferior in quality compared to other oil stocks, right? Once again, when we examine the quality of assets under CVX stock, it comes up as undervalued compared to the others. Return on investment, or ROI, should tell us if the stock is worth some premium. ROI is a measure of returns the company is able to obtain on its long-term assets, i.e. oil rigs, pipes, etc. While some other oil stocks may have superior ROIs, the assets under CVX stock yield a respectable 11.05% per year. That is, more or less, in the middle and suggests that Chevron’s assets are worth a premium.
The Bottom Line
Of course, there are numerous reasons why CVX stock may be undervalued. They range from a dispute with union workers that resulted in operational delays, to its high exposure, to a struggling China. But, as we have shown, Chevron’s assets are yielding well, and currently this yield is not priced into the stock at all. It may be true that XOM stock and PSX stock have superior quality assets. In the case of Chevron, though, it can be argued that, sometimes, average assets at bargain prices may make the best investment.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
