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Is there Such a Thing as a “Cheap Stock”?

Jon Brown Jon Brown, Stockhouse
0 Comments| September 13, 2019

A Value Play Sector: Low-Cost Entry, Long-Term Potential

Everyone loves a bargain. Investors are no different, always on the lookout for a big return on as little dollars as possible, but the trick is obvious – if it were so easy, wouldn’t everyone get rich?

The market doesn’t work that way. Even so, there are ways to find value, which should always be a consistent factor in any financial decision.

When it comes to a specific sector to follow, the energy market, as controversial as it may be, sees a lot of cash resonating from within. These stocks currently trade lower on the market, but show some upside potential.

Whitecap Resources Inc. (TSX: WCP) - Currently less than $5 a share, Whitecap Resources is an crude oil and natural gas producer in western Canada. The company acquires assets with discovered petroleum initially in place and low current recovery factors. WCP recently reduced its second half capital expenditures program for 2019 by 17% to $250 million from $300 million.

Encana Corporation (TSX & NYSE: ECA) - Also trading at less than $5 a share, ECA is an independent oil and gas producer. At the end of 2018, the company reported net proven reserves of 726 million barrels of oil equivalent. Net production averaged 361 thousand barrels of oil equivalent per day in 2018, at a ratio of 43% oil and natural gas liquids and 57% natural gas.

ARC Resources Ltd. (TSX: ARX) - Another independent Western Canadian oil and natural gas producer, ARX production averaged 132.7 thousand barrels of oil equivalent per day in 2018, and the company estimates that it holds approximately 879 million barrels of oil equivalent of proven and probable crude oil and natural gas reserves.

Vermilion Energy Inc. (TSX & NYSE: VET) - A Canadian oil and gas producer, Vermillion engages in full-cycle exploration and production programs that focus on the acquisition, exploration, development, and optimization of producing properties in North America, Europe, and Australia.

Macro Enterprises Inc. (TSX-V: MCR) – A Canadian pipeline company trading at four times future earnings and just saw the biggest revenue year in company history. This company is buying back its shares with high inside ownership. Peak revenues sat around $211 million when its stock was at its all-time highs.

The energy market is highly volatile and novice investors would be advised not to dedicate a large portion of their portfolio to energy stocks alone. Within the next year to three years, oil prices are expected to climb higher and the world market is projected to continue to grow.

There are many other value plays in the energy sector, though these five companies should be a good start for an investor’s due diligence process. Upon finding a stock with an attractive share price, the next move an investor should make is to look through the company's recent news to see where they are at with production, then check their corporate presentation to better understand the operations' resources. Investors should also keep their eyes on the next Canadian federal election, the outcome of which will likely change the course of domestic energy production in the country.

These stocks could offer robust potential if you can wait one to three years while taking a 10% yield in the meantime. Such valuations revolve around about the price of oil (and to a lesser degree gas), so it's hard to predict profitability going forward, but this is a good place to start, if you’re looking at potential returns mixed with low market price.


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