When you study the stock market for several decades, as I have, one thing becomes abundantly clear: Stocks within industry groups rise and fall in synch with each other. In theory, the better-quality companies’ stocks rise more and fall less than stocks of the lower-quality companies.
Throughout 2017, you’ve heard the financial media buzzing about the energy sector, enough that you know there’s value there. But timing is everything. It’s a happy investor who can both identify an undervalued industry and buy its stocks right as they’re breaking out of trading ranges. One reason there’s so much value among energy sector stocks—aside from a current cycle of strong profit growth—is that investors have ignored them! Therefore, prices remain suppressed.
[text_ad]
Energy Sector Stocks: Oil Stocks
Exploration and production companies are all quietly paying big dividends and waiting for share prices to rise. The price charts on oil service companies look a tad worse, although they’re turning around after recent bottoms. Look more closely, though, and you’ll see that there is actually a fire that’s been lit under oil refining stocks and oil marketing stocks. As a group, these stocks are all on the verge of breaking out of long-term trading ranges, including Andeavor (ANDV), Marathon Petroleum (MPC), Phillips 66 (PSX) and Valero (VLO) energy sector stocks.
Phillips 66 (PSX), an Appealing Energy Sector Stock
I recommended Phillips 66 (PSX) on June 29, 2017, saying, “I would not buy PSX for a short-term trade, but rather with the expectation that the stock will finally rise above 90 at some point in the next three to 12 months, beginning a sustainable run-up.” Now that shares of so many refining and marketing companies are breaking out of their trading ranges, it’s time to make a decision on PSX.
Phillips 66 (PSX) is an oil and gas refiner and marketer, and a chemical manufacturer that’s based in Houston, TX. The company is in a great-and-improving cash flow situation, with $2.2 billion cash on hand, relatively low debt levels and several major capital projects coming to an end in 2017, paving the way for even bigger cash flow in 2018. Shareholders are being rewarded with big dividends and share repurchases.
Investors have been both worried about Houston-area businesses suffering from Hurricane Harvey, and excited that the ensuing increase in gasoline prices is benefiting their refining and marketing stocks. These are both valid focal points in the short-term. Phillips’ Sweeny refinery in Old Ocean, Texas was shut down as a result of the storm, and is expected to reopen this week.
Phillips’ annual profit trend is on an upswing, as companies throughout the energy sector rebound from several years of falling earnings and net losses. Phillips’ adjusted earnings per share (EPS) fell from $7.67 in 2015 to $2.82 in 2016. At this point, a consensus of Wall Street analysts expects Phillips 66 to earn $4.20 and $5.81 per share in 2017 and 2018 (December year-end), reflecting very aggressive earnings growth rates of 48.9% and 38.3%. Those are impressive earnings growth rates for a company that’s bringing in over $100 billion in annual revenue; the kind of growth rates that you might typically find on a small-cap stock.
What’s more, the stock’s 2017 and 2018 price/earnings ratios (P/Es) are less than half the earnings growth rates, at 20.4 and 14.8 respectively. That means there’s lots of room for PSX to rise before anybody would consider this energy sector stock to be fairly valued.
Shareholders are currently receiving $0.70 per share each quarter, with a current yield of 3.3%.
PSX is a large-cap stock in the energy sector. The stock has traded in a sideways pattern between 70 and 88 for two years. We just saw Phillips’ peers Andeavor (ANDV) and Valero (VLO) finally surpass long-term trading ranges, and I believe Phillips is right on their heels, about to break into all-time high territory.
PSX could appeal to growth investors, dividend investors and value investors.
To find additional energy stocks recommended by Wall Street’s Best analysts, click here.
