Many investors know that I’ve been pounding the table on energy stocks since November 2016. I last updated you on several top energy stocks in early November 2017, when the price of West Texas Intermediate (WTI) crude oil broke out of a 19-month trading range and began another run-up.
Since that time, WTI rose from 58 to 66, rested for about three months, and now the price is breaking out on the upside again. Energy stocks initially rose rapidly as oil prices rose in December and January, but when the correction finally arrived in the broader stock market, energy stock prices took a couple of months to begin their recovery. Fortunately, their recovery is in full swing now.
Let’s revisit my recent November top energy stock recommendations — Chevron (CVX), Phillips 66 (PSX) and Valero Energy (VLO) — to determine whether they’re a buy, hold or sell.
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Top Energy Stock 1: 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 73.2% in 2018, on the back of an almost 300% EPS increase in 2017. What’s more, earnings estimates have been rising aggressively for many months. Wall Street can’t keep up with Chevron’s successes!
The 2018 price/earnings ratio (P/E) is 19.1, solidly lower than the EPS growth rate, indicating that the stock remains undervalued. Chevron does not increase its dividend on a predictable schedule. The last two increases in the quarterly payout took place in the fourth quarter of 2016 and the first quarter of 2018.
CVX rose from 115 in early November to a January high of 132 – a 15% gain – before coming back down to 109 during the stock market correction. At this point, the stock has completed more than half of its rebound to 132. I expect CVX to rest once it retraces its January high, and quite possibly begin another run-up later in 2018, given a neutral-to-bullish stock market. Growth and income investors should consider buying Chevron shares today.
Top Energy Stock 2: Phillips 66 (PSX – yield 2.5%) is an oil and gas refiner and marketer, and a chemical manufacturer. After delivering EPS growth of 55.3% in 2017, consensus estimates point toward continued aggressive EPS growth of 58.7% and 17.8% in 2018 and 2019. The corresponding P/Es are very low at 15.9 and 13.5, indicating that the stock is undervalued. Earnings estimates have been increasing steadily since October 2017, and each upward revision serves to lower the P/E, making PSX a compelling bargain!
Phillips 66 is due to announce an annual dividend increase in early May, a few days after reporting first quarter results this week on the morning of April 27. In recent years, the dividend increase ranged from 11% to 13%.
PSX rose from 93 to 106 immediately after I recommended the stock in November. After subsequently falling down to 90 with the correction in the broader market this year, PSX rested a bit, then raced upward to a new all-time high of 111 last week, representing a 19% capital gain for investors who bought upon my November recommendation.
While there’s no doubt that PSX could easily appeal to growth, value and dividend investors, my sense is that the share price is going to need to rest a bit before resuming its uptrend. I anticipate a pullback to about 104, at which time I strongly recommend buying the stock.
Top Energy Stock 3: Valero Energy (VLO – yield 2.9%) is the largest independent oil refiner in its industry. The company has been thriving alongside rising energy prices and strengthening global economies.
Valero returns large amounts of cash to shareholders annually, via share repurchases and annual dividend increases. Additionally, with $5.8 billion in cash reserves, the company could be focused on acquisitions this year.
The company is on track for another year of aggressive earnings growth in 2018. Watch for first quarter results to be reported on the morning of April 26. After delivering 33.3% EPS growth in 2017, Wall Street expects EPS to grow 45.4% and 16.4% in 2018 and 2019. The corresponding P/Es are quite low at 15.0 and 12.9, indicating that VLO remains solidly undervalued.
VLO rose from 80 to 98 after my November recommendation, pulled back to 86 with the stock market correction this year, then began hitting new highs again. Last week’s new all-time high of 108 represented a 35% capital gain for investors who bought PSX in early November. The stock appears to be completing a run-up, and will likely rest for a while. Growth, value and dividend investors should watch for an opportunity to buy VLO on pullbacks.
For additional undervalued growth stock recommendations, consider taking a trial subscription to Cabot Undervalued Stocks Advisor which I edit.
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