I’m so glad to have held many different types of energy stocks in my portfolios this year. Sometimes the stock market hands you an incredible gift on a silver platter, and all you need to do is (1) grab the gift and (2) say “thank you.” (I always try to be polite.)
Did the 2017 rebound in energy companies’ profitability and their share prices catch you by surprise? If so, let me tell you how I knew in advance that it was coming, so that you can identify these trends for yourself in the future.
My readers know that I’ve been pounding the table on energy stocks since last November.
Quick background: When a stock or an industry is having a turnaround in its financial performance—presuming that it operates on a December fiscal year—I wait until October or November to recommend its purchase. At that time, even though the company is finishing up a mediocre or poor year, the stock market has turned its attention to the future. Stocks will begin moving based on the next year’s expected earnings growth.
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During 2017, I recommended Chevron (CVX), Phillips 66 (PSX) and Valero Energy (VLO) here at Wall Street’s Best Daily. Let’s check in on these excellent energy stocks to see how well they’re performing.
Three Energy Stocks to Buy Now
Chevron (CVX – yield 3.7%) is a U.S. integrated oil company, in the business of energy exploration, production, storage, refining, marketing and petrochemicals. Analysts expect Chevron’s earnings per share (EPS) to grow aggressively at 27.4% in 2018, on the back of a triple-digit EPS increase in 2017. The 2018 price/earnings ratio (P/E) is 22.8, solidly lower than the EPS growth rate, indicating that the stock remains undervalued.
The company does not increase its dividend on a predictable schedule. The last increase in the quarterly payout took place in the fourth quarter of 2016.
I recommended CVX in May 2017 when the price was 106.22, saying, “I expect the share price to rise immediately … There’s some upside price resistance at 116, where the stock will likely rest before continuing its upward climb.” The stock proceeded to climb as high as 120 in October before finally having a pullback. CVX is now at 116.67, up 9.8% (plus dividends) from my May recommendation.
I expect CVX to continue trading between 113 and 120 for at least a few more weeks before venturing past 120. This is a great time to accumulate shares of this aggressively growing oil major.
Phillips 66 (PSX – yield 2.9%) is an oil & gas refiner and marketer, and a chemical manufacturer. I wrote about PSX in June 2017. Despite the 16% capital gain that followed, the stock is even more attractive now than it was then! Earnings growth projections are more aggressive, and the price/earnings ratio (P/E) and debt ratio are low. Analysts expect earnings per share (EPS) to grow 37.9% in 2018, with a P/E of just 15.4. Also, watch for another dividend increase in May 2018.
I recommended PSX in June, just as the stock was rising out of a four-month sideways trading pattern, when the price was 81.66. At that time, I wrote “I would not buy PSX for a short-term trade, but rather with the expectation that this undervalued energy stock will finally rise above 90 at some point in the next three to 12 months, beginning a sustainable run-up.” The stock rose immediately and surpassed 90 in September.
PSX is now at 94.55, up 15.8% plus dividends. The stock rested for a few weeks in October, and now appears ready to launch above 95 to new all-time highs. Buy PSX now.
Valero Energy (VLO – yield 2.9%) is the largest independent oil refiner in its industry. Energy refiners are thriving this year, as seen in recent third-quarter reports. The company has significantly benefited from high export margins to Latin America, Mexico and Europe.
Valero has a hefty $5.2 billion in cash, with up to $1.6 billion allocated to ongoing share repurchases. Investors can expect Valero to continue buying its stock, and another annual dividend increase will likely be announced in late January 2018.
The company is on track for another year of aggressive earnings growth in 2018. Wall Street expects earnings per share (EPS) to grow 26.7%, yet the price/earnings ratio is only 15.3, indicating that VLO remains solidly undervalued.
I recommended Valero in February when the price was 65.22, in anticipation of a breakout past 70. The breakout occurred in September and the stock’s still rising, now at 81.67. That’s a 25% capital gain (plus dividends!) in nine months!
In the near term, VLO could easily stop rising and rest for a spell. However, the medium-term outlook bodes well for continued share price appreciation. Buy Valero on pullbacks.