This morning's G&M What are we looking for?
North American-listed energy companies with positive valuation metrics and upside price momentum amid the current market downturn.
The energy sector continues to outperform all S&P 500 sectors. The Energy Sector Fund (XLE) ETF has gained 48.65 per cent year-to-date, and 59.84 per cent over the past 12 months.
Our research team at Trading Central follows a strict top-down approach to stock picking. We are only interested in stocks that are outperforming relative to our benchmark, the S&P 500, and are in sectors that are trending higher. We are not interested in catching falling knives.
The only sector that continues to trend higher from a price perspective is energy, and it has been outperforming the S&P 500 index since the beginning of this year.
The screen
We will be using the Trading Central Strategy Builder to search for North American-listed energy stocks that have fundamental characteristics that are attractive to a value investor, and also have short-term upside price momentum.
We begin by setting a minimum market capitalization threshold of US$2-billion to screen out the smaller companies in the sector that tends to have above-average volatility.
Next, we screen for energy stocks that have a price-to-cash flow ratio below 9. This ratio measures how much a share costs versus the cash flow being generated by the company. It is often a more reliable measure than price to earnings, as it is harder for a company to manipulate its cash flow numbers than its earnings per share numbers.
In order to avoid companies that are highly leveraged, we focused on companies in the energy sector that are indicating a debt-to-equity ratio of less than 0.75. The higher the ratio, the more leveraged the company is.
It is also important to analyze the companies’ return on equity, which measures how effectively management has used invested capital to generate income. We set a minimum of 8-per-cent ROE.
We are also interested in energy companies with an operating margin of 10 per cent or greater. Operating margin is a measure of how much profit the company makes on each dollar of revenue. Higher operating margins are preferred.
Finally, we screened for stocks in the energy sector that have returned 5 per cent or more over the past four weeks in order to find stocks that are indicating short-term upside price momentum.
More about Trading Central
Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.
What we found
Attractively valued energy stocks seeing price gains
| RANK | COMPANY | TICKER | RECENT PRICE ($)* | MKT.CAP. ($ BIL)* | ROE.(TTM)(%) | PRICE/CF | OPER.MGN. (TTM)(%) | DEBT TO EQTY. |
| 1 | Devon Energy Corp | DVN-N | 69.92 | 46.1 | 40.50 | 7.6 | 31.2 | 0.72 |
| 2 | Alliance Resource Partners LP | ARLP-N | 18.18 | 2.3 | 16.45 | 5.0 | 15.81 | 0.37 |
| 3 | Pioneer Natural Resources Co | PXD-N | 271.08 | 65.6 | 20.03 | 8.4 | 39.59 | 0.25 |
| 4 | TotalEnergies SE | TTE-N | 54.4 | 142.3 | 15.62 | 4.4 | 14.86 | 0.56 |
| 5 | Tourmaline Oil Corp | TOU-T | 71.3 | 12.9 | 19.90 | 7.3 | 50.66 | 0.05 |
| 6 | Suncor Energy Inc | SU-T | 48.6 | 68.7 | 16.75 | 5.7 | 20.22 | 0.47 |
| 7 | Birchcliff Energy Ltd | BIR-T | 10.7 | 2.8 | 22.93 | 5.0 | 42.24 | 0.21 |
| 8 | Cenovus Energy Inc | CVE-T | 26.71 | 52.9 | 8.44 | 7.7 | 10.28 | 0.61 |
| * Market Cap and recent price figures shown in native currency |
Our screener ranks the list based on all performance and revenue criteria.
Topping our list is Devon Energy Corp., an independent energy company engaged in the exploration, development and production of oil and natural gas. The company has the highest return on equity on our list at 40.5 per cent and the second-highest dividend yield on our list at 7.27 per cent
Tourmaline Oil Corp., a Canadian crude and natural gas exploration and production company, has the lowest debt-to-equity ratio on our list at 0.05. The company’s operating margin is the highest on our list at 50.66 per cent. The stock price is within 2 per cent of its historic high as it continues to trend higher.
Suncor Energy, another Canadian based integrated energy company, has the best four-week price performance on our list at 12.6 per cent and one of the lowest price/cash flow ratios on our list at 5.7. Its dividend yield is 3.87 per cent.
Although the energy sector continues to trend higher in what looks like a bear market in North American equities, we anticipate more volatility and always suggest having a stop-loss exit strategy. Knowing where you will exit a position before entering is key in this market environment.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.