With crude oil prices stabilizing at the 200-day moving average, the rout in energy stocks is over. With seeds for the next ascent now planted, it’s time to identify cheap oil stocks to cash in on the next rally. And I’m not just talking about those boasting low price tags. Valuation is a function of price and earnings.
For an oil stock to qualify as cheap, it must be trading with a P/E ratio lower than the S&P 500 and its sector. I used trailing 12-month earnings. Had I used forecast earnings for the next year, the valuations would have looked even better.
Much of the prospect for future energy growth comes down to crude oil behavior. While the consumer inside me would love for black gold prices to get destroyed, current inflationary pressures aren’t likely to disappear overnight. If prices remain near their current perch for any time, energy companies will continue to print massive profits.
That said, here are three cheap oil stocks to consider.
Marathon Oil (MRO)
Marathon Oil (NYSE:MRO) offers a double dose of cheapness. First, it provides the lowest price tag of today’s picks at around $23. Second, it has the cheapest valuation. Over the past 12 months, the exploration and production company has raked in $2.86 of earnings per share. Compared to Friday’s closing share price of $21.75, this translates into a price-to-earnings ratio of 7.6.
But we’re not blindly bottom fishing a cheap valuation here. The chart of MRO stock gives additional reasons for optimism. Prices returned to the high side of the 200-day and 20-day moving averages, and we just formed a higher pivot low. It’s the first such increase in demand since mid-May. MRO is up 5.5% in early morning trading on Monday and now testing the old resistance pivot.
Consider acquiring shares or selling naked puts if you want a higher probability of profit.
The Trade: Sell the August $22 naked put for $1.05.
Conoco Phillips (COP)
The flight path of Conoco Phillips (NYSE:COP) has mirrored Marathon Oil, so the technical posture is similar.
The recent recovery pulled prices above the 200-day and 20-day, and $100 is within striking distance. On the fundamental front, the Houston-based E&P company has raked in $9.72 of earnings per share over the past year. At Friday’s closing price of $88.13, that works out to a price-to-earnings ratio of 9.1.
Income seekers will be happy to learn COP stock has the highest dividend yield of today’s targets, at 3.07%.
Purchase shares or a vertical call spread to capitalize on the return to $100.
The Trade: Buy the September $90/$100 bull call spread for $4.
Occidental Petroleum (OXY)
The final contender for cheap oil stocks to buy is Occidental Petroleum (NYSE:OXY). Thanks to significant investments from Warren Buffett, the Texas energy company has scored a massive 119% year-to-date gain. And yet, despite the price jump, the earnings have risen enough to keep the valuation within reason. Combining the trailing 12-month earnings of $6.63 with its share price of $61.06 yields a still cheap price-to-earnings ratio of 9.3.
You don’t have to feel like you’re chasing OXY stock. It reached the low $60s in March this year and has treaded water since. With Monday’s pop, prices are now itching for an upside breakout.
Buy OXY stock or play it with options.
The Trade: Buy the September $65/$75 bull call spread for $3.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.