Energy stocks have been slammed by the price
of oil and the sector is the worst in the
market over the past five years, but that
might mean now is the perfect time to buy.
In this video, I’ll show you what I look
for to find the best of breed in the space,
then I’ll reveal the five best oil stocks
for your portfolio.
We’re talking top oil stocks to buy today
on Let’s Talk Money!
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Hey Bowtie Nation, Joseph Hogue with the Let’s
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Hey, I’m excited nation.
This is the second video in our series on
picking the best stocks in each sector and
the response has been amazing.
That first video on the best tech stocks was
one of the most popular ever in the first
few days and I’m excited about this one!
America is undergoing an era of energy independence.
It’s now the largest producer of crude oil
in the world and will be the top oil exporter
soon as well.
The oil boom is driving an energy renaissance
and every portfolio needs a piece of the action.
Now because of worries around global growth,
a lot of the companies in the energy sector
have been hit hard on lower prices over the
last few years.
The sector fund has underperformed the broader
market by more than 85% over the last five
years.
But nobody ever got rich buying when stocks
were expensive and this may be the only cheap
sector in the market.
If you look at the sectors by forward price-to-earnings,
that’s the price divided by earnings analysts
expect in the sector over the next year, the
energy sector is THE ONLY ONE to trade at
a discount to its 10-year average.
The dark blue line there is the forward PE
for the sector, right now at 17.1-times for
stocks in the energy sector.
The green bar is the average forward PE value
for over the last ten years, so 20.3-times
for the sector.
That means energy stocks are trading at a
discount of 16% over that longer-term average.
That gets even more amazing when you consider
some sectors like tech are trading for a 30%
premium, a third more expensive than that
10-year average and the broader market, here
using the S&P 500, is trading at 17-times
its forward PE or 14% higher than the long-term
average.
This might just be your once in a decade opportunity
to buy oil stocks at a discount.
If you’re just joining us, we’re doing
11 videos to reveal the best stocks to buy
in each sector of the economy.
I’m looking at each sector from tech to
energy, consumer goods and utilities to show
you how to find the best of breed companies
in each and create that diversified portfolio
for growth and cash flow.
This is hugely important because even though
I love the opportunity in oil stocks right
now, you have absolutely got to have stocks
in those other sectors.
It’s going to give you the diversification
you need, smooth out those returns, while
you wait for the rebound in energy stocks.
So let’s get started because I’m excited
to talk oil stocks with you.
If you’re coming in later to the series,
I’ll link in the first comment below the
video to the most recent video.
I’ll also be linking in the video description,
all the videos in the series so you can see
all the stocks for each sector.
Now those of you in the nation know, I’m
not about to just throw five stock picks at
you.
I’m going to show you how I picked these
stocks first, give you the tools to do this
on your own.
Then I’ll show you three energy sector funds
you might consider buying to get that targeted
exposure to the sector before I reveal the
five oil stocks I’m buying right now.
Here’s that graphic again of the stock sectors
and today we’ll be looking at energy including
explorers, pipeline operators, those large
integrated companies and the drilling equipment
companies.
So I looked for four criteria when screening
for these stocks to buy.
I’m going to run through these quickly because
I want to get to those stock picks and I already
walked through each in our first video on
tech stocks.
If you don’t know exactly how I’m using
these, the process I use to pick stocks, please
check out that video linked in the description
because these are fundamentals you need to
be using anytime you pick stocks.
Screening for increasing sales and cash flow
are extra important with oil stocks lately
because of the trouble they’ve had on lower
crude prices.
Any company that can produce sales and cash
flow in this environment is a solid bet.
That operating margin is powerful, like Thanos
on steroids powerful, and the number one factor
I always use to find stocks to buy.
This is the operating income, so what’s
left after taking all the business expenses
out of sales, so that baseline business profit
then divided by sales.
It’s the best measure of how well management
is doing and something you want to compare
against competitors to find the best run companies.
Dividends are another obvious choice.
I love getting paid while I invest and dividend
payers just tend to beat other stocks.
I’ve picked some cash flow machines in the
sector, one with a dividend yield of ten percent,
so stay tuned for that.
Finally, I’m looking for companies with
a competitive advantage and catalysts for
growth.
You see, the other factors are mostly already
baked into the shares.
The market knows the company’s rate of sales
growth, it’s operating margin and dividend
yield.
It’s these catalysts you find and the competitive
advantages that make for great long-term investments.
I’ll share those five oil stocks I found
next but first I want to highlight three energy
funds you might also consider.
If you can’t find stocks you really like,
so if no stocks fit your screening, you might
consider putting some money into these funds
just to get that exposure to energy investing.
Then you can invest in stocks of other sectors
like we’ll talk about in the series but
still have some of that high dividend yield
from energy.
Our first tech fund is the Energy Select Sector
SPDR, ticker XLE.
This holds shares of 28 of the largest energy
companies based in the U.S. but is surprisingly
diversified from upstream explorers to downstream
retail.
Companies in the fund have an average market
cap of $130 billion dollars so we’re talking
the largest like Exxon, Chevron and Valero
Energy.
The fund charges an expense ratio of 0.13%
which is extremely low and pays a 3.7% dividend
yield.
While that XLE fund gives you broad exposure
to the energy sector, the SPDR S&P Oil & Gas
Exploration & Production ETF, ticker XOP,
is much more focused on that upstream segment
of energy, drilling and producing the oil.
This fund holds shares in 60 companies drilling
and producing the oil & gas, mostly in the
U.S. and there are a couple of reasons I like
this better than the more popular sector fund,
that XLE.
First is the average market cap here is just
$23 billion, which is still big companies
but not that mega-cap we saw in the XLE.
That means a little more flexibility and faster
growth for these stocks.
You’ve also got a more diversified fund.
That XLE has more than 40% of its assets in
just two stocks, Exxon and Chevron, while
no single stock accounts for more than 3%
of the XOP.
Now it’s not all roses and rainbows.
The XOP fund has a higher expense ratio at
0.35% and a lower dividend yield at 1.4% but
is a great fund for your portfolio if you
don’t want to pick individual oil stocks.
This last fund before we look at those five
best stocks in energy is going to come as
no surprise to those of you in the nation.
This fund is in our 2019 dividend portfolio
and I love the theme for long-term dividends.
The Alerian MLP ETF, ticker AMLP, holds shares
of 32 master limited partnerships which are
special types of energy companies with huge
yields.
The fund currently pays an 8.4% dividend and
look at it against some of these other high-yield
and cash flow options.
More than twice the dividend yield compared
to REITs and four-times the yield you get
from the broader market.
The fund invests across companies in that
midstream segment of energy; the pipeline
transportation, refining and storage.
These companies charge a fee on volume so
it’s not all about the price of crude here.
They get a special tax break if the majority
of profits are passed through to investors
so you get an insanely high yield on the fund.
Even if you do invest in a few oil stocks
like the ones I’ll highlight now, you might
still consider putting money in some of these
funds.
That’s going to give you the opportunity
for higher returns from that individual stock
pick but also spread your money out a little
across the dozens of companies in the fund.
Our first two oil stocks are going to be cash
flow monsters in the MLP space with Energy
Transfer, ticker ET, and it’s 9.9% dividend
yield first.
ET is a leader in midstream with 9,300 miles
of crude pipeline, making it the largest in
the U.S. and assets across the transportation,
processing and storage space.
MLPs have been hit just as hard as the rest
of the energy space since 2014 but there are
some strong reasons to buy in here.
Energy transfer was investing over $8 billion
a year in acquisitions and development from
2015 through 2018.
Assets were cheap after the 2014 crash and
management made some very smart moves.
Now a lot of those big development projects
are coming online and starting to cash flow.
Combine that with the fact that management
plans on cutting investment spending in half
to just $4 billion a year and cash flow could
surge.
The company had a coverage ratio of 2.0-times
the distribution in the most recent quarter
and this is a very important measure for MLPs
so I want to explain it a little.
The coverage ratio is the company’s distributable
cash flow, the cash it has left over after
maintenance spending, over the amount is distributes
to shareholders.
Some MLPs will have a coverage ratio less
than one, meaning they’re paying out more
than is available, something that obviously
can’t go on for long.
So for Energy Transfer to be able to cover
it’s distributions, a yield that’s almost
10% right now, to be able to cover that by
two-times means that cash flow is all but
guaranteed.
Better though is that management expects the
coverage ratio to come down to around 1.8-times
long-term which to me hints that they expect
to increase the dividend, right?
Cash flow isn’t decreasing with all these
new projects and lower investment spend, so
there’s only a couple other things they
can do with that money.
ET is either going to begin buying back massive
amounts of its stock or hiking the dividend,
or both and that’s going to send the shares
higher.
Of the seven analysts covering Energy Transfer,
the lowest price target is $18 per share or
about 46% above the current.
The high target at $24 a share is nearly double
the current price.
Now there is one thing you need to know about
MLPs, something we’ve covered here on the
channel but I want to make sure you get it
here.
MLPs are a special type of company and you’ll
get a special tax form called a K-1 each year
you own shares.
That form is going to detail different types
of returns from the shares and you put this
into your taxes differently than other dividend
stocks.
You don’t get that K-1 tax form when you
invest in the AMLP fund which is why a lot
of people just put their money in it instead
of individual MLP companies but the form really
isn’t difficult.
Any tax software like TaxAct or TurboTax makes
it easy and any tax service will do it for
you.
For my money, there is just too much opportunity
in these MLPs to pass up because of that little
extra effort on your taxes.
Enterprise Products Partners, ticker EPD,
is similar to Energy Transfer in that midstream
MLP segment.
Now the dividend yield is only 6.6% here though
the share price has held up better than ET
over the last five years and there’s good
reason to believe both the price and dividend
are heading higher.
EPD is a massive company with 50,000 miles
of pipeline transporting crude, natural gas
and other chemicals.
It’s connected to every major U.S. shale
play and 90% of the refineries east of the
Rockies.
Researching the company, I found three charts
that really prove the case for investment.
First, this graph in the upper-right.
The blue and grey lines are the company’s
operating profits and distributable cash flow.
That red line is the price of crude and you
see how much oil prices have jumped around
but the company’s cash flow has grown consistently.
This is because the company makes 85% of its
gross operating profits on a fee-basis.
It charges oil companies a fee for using the
pipelines and charges on volume rather than
the price of oil.
This company is generating massive amounts
of cash regardless of where oil prices go.
The next chart here in the lower-left again
shows oil prices in that red-dash against
a steady climb in the distribution and cash
flows per share.
This is a company you can count on to consistently
increase the payout.
And finally here, the blue section in that
lower-right chart shows the cash paid out
to investors with the grey area the cash the
company is saving.
The company has a distribution coverage of
1.7-times so lots of cash flow above the distribution
and its cash reserves are growing.
That’s going to mean more increases in the
distribution and share buybacks to drive the
stock price higher.
Not as many analysts covering EPD but target
prices are all well above the current share
price.
The low target here is for $33 a share with
the high around $41 and remember, this is
beyond the 6.6% dividend yield you collect.
Energy giant BP has had its problems but the
shares have actually outperformed the broader
energy sector over the last few years and
its paying a monster 6.4% dividend.
The company reported a pretty awful third
quarter, sending the shares down 3% but production
and financials should improve over the coming
quarters.
Operating cash flow was still solid at $6.5
billion and more than enough to cover investment
spending and the dividend.
BP owed a $2 billion payment this year to
cover the Deepwater Horizon settlement but
that drops to just $1 billion annually for
the remainder.
The company has been cost-cutting since 2013
which is supporting cash flow and profits.
Shares trade for just 10-times earnings though
profits are expected lower to $3.13 per share
over the next year.
Looking at the company’s history of beating
expectations, I think earnings can come out
around $3.30 on the low side which would mean
a price-to-earnings of 11.5-times, still in
that value territory.
One potential for surprise upside is BP’s
20% ownership of Russian oil giant Rosneft.
The asset value has taken a hit on geo-political
tensions and earnings are down on lower crude
prices but this could make for a boom in the
shares if the picture improves.
I’m showing this chart because I’ve used
it on all the other picks but you probably
shouldn’t read too much into it.
With just two analysts rating the shares,
you really can’t get much from the $53 price
target.
I think the shares could be worth at least
$45 each over the next year and higher over
the long-term.
You’ve got some good potential for price
appreciation and a solid dividend payer while
you wait.
Baker Hughes, ticker BKR, is kind of a weird
case with it’s 2017 merger then split from
GE earlier this year.
BKR was rapidly losing market share in its
oilfield services business until the 2017
merger but has been able to turn it around
over the last couple of years.
Revenue in the segment was up 12% year-over-year
in the last quarter which is way ahead of
competitors reporting sales that are flat
and even lower over the year.
Shares are trading a little rich at 26-times
earnings but it’s because profits are expected
to boom 60% over the next year which puts
the forward price-to-earnings at just 16-times.
Analysts see the shares higher with a low
target of $27 per share to a high target of
$34 each over the next year.
I’m not sure the shares reach that high
target but even the lower one is a 26% return
on top of the 3.3% dividend yield.
Marathon Oil, ticker MRO, is a smaller oil
exploration company at just $9 billion market
cap but pays a 1.7% dividend and has strong
upside potential.
The company has struggled under lower oil
prices for the last few years but reported
second-quarter results that were well above
expectations.
Oil production came in at the top end of what
everyone was expecting and a cost-cutting
program has lowered production costs to their
lowest ever.
Just like with BP, we’re looking at expectations
for earnings to decrease over the next year
but the street is notoriously bad at predicting
earnings for this company.
For example, it beat expectations by 342%
and 77% in the first and second quarters.
On a trailing basis, shares trade for about
12-times earnings and are probably better
than they look on a forward basis.
Despite the tough earnings picture, analysts
have price targets between $13 a share on
the low-end and $21 per share at the high-end.
Click on the video to the right for the first
in our series and the five best tech stocks
for your portfolio.
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