3 Big Oil stocks poised to get bigger

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Over the last few years, oil has been one of the most-talked-about issues when it comes to the economy and the stock market. Prices of crude oil have been shooting upward -- and causing gasoline prices to do the same. The past week has been no exception.

Crude oil reached another record high recently, nearing $120 a barrel after a U.S.-contracted ship fired warning shots at boats that may have been Iranian in the Persian Gulf, according to The Associated Press. Oil prices dropped Wednesday, but gas prices hit yet another record, reaching a national average of $3.62 a gallon, the AP reported.

Those rising fuel prices have been a boon for oil companies. Profits have shot through the roof. But as we move forward, a number of worries hover over Big Oil. The price of extracting oil from the ground is rising. The "green energy" movement is pushing for alternative power sources such as wind, solar and hydrogen. And political issues -- both in the unstable Middle East and in oil-rich Venezuela -- threaten these companies' ability to obtain oil.

With all that's going on in the oil industry, the obvious question is, can Big Oil be a big winner in the market in the coming months and years? Well, my Guru Strategies -- computer models based on the approach of different investing greats -- answer that with a resounding yes.

My models are high on several oil companies right now, including three that are part of my Strategy Lab portfolio: Chevron (CVX, news, msgs), Eni (E, news, msgs) and ExxonMobil (XOM, news, msgs). While the industry will face some challenges in the coming years, my models say these firms will overcome them. Let's take a look at just why these stocks rate so highly.

Eni

Based in Rome, this integrated energy company is active in about 70 countries around the world, operating in several areas, including oil and gas, electricity generation and sale, petrochemicals, oilfield services construction and engineering industries. Over the past 12 months, the company (market cap: $141.2 billion) has raked in more than $131 billion in sales.

Eni gets high marks from the contrarian strategy that I base on the writings of David Dreman. As a contrarian, Dreman targets stocks that have strong fundamentals but are being overlooked by the market, usually because of apathy or fear. Perhaps because of the concerns surrounding the oil industry, Eni earns contrarian status from my Dreman model because its price-earnings ratio (9.63), price-to-cash-flow ratio (5.74) and price-to-dividend ratio (18.66) all fall into the market's bottom 20%. All those figures show Eni isn't getting much love from Wall Street right now.

To make sure a stock isn't out of favor for good reason, my Dreman model examines it using a variety of fundamental tests. One is profit margin, which Dreman wanted to be at least 8%. Anything over 22% is phenomenal, according to this model, and Eni's pretax margins of 22.62 fall into that stratosphere.

Two more reasons my Dreman model likes Eni: the firm's 24.16% return on equity and 5.36% dividend yield.

ExxonMobil

With a market cap of almost $490 billion, Exxon is the largest energy company in the world and, more simply, one of the largest companies in the world. The Texas company is involved in the exploration and production of crude oil and natural gas, the manufacturing of petroleum products and the transportation and sale of crude oil, natural gas and other products.

But it nevertheless passes the growth-stock strategy that I base on the writings of James O'Shaughnessy, which shows the energy giant still has plenty of room to grow. When looking for growth stocks, O'Shaughnessy first made sure that a company had a market cap greater than $150 million to screen out stocks that were too illiquid for most investors. This obviously isn't a problem with Exxon.

When it came to a growth stock's earnings, O'Shaughnessy was more concerned with consistency than magnitude. His method called for a company's earnings per share to have increased in each year of the most recent five-year period. With earnings per share over the past five years of $3.15, $3.89, $5.72, $6.62 and, most recently, $7.28, Exxon shows the kind of earnings persistence O'Shaughnessy liked to see.

In his extensive study of more than 40 years of stock return data, O'Shaughnessy found one variable that was the most likely predictor of future winners: the price-sales ratio. For growth stocks, he found that those with P/S ratios below 1.5 were good buys, and Exxon, with a 1.21 P/S ratio, passes the test.

Finally, O'Shaughnessy took all of the stocks that passed the first three aforementioned criteria and ranked them according to relative strength, the measure of how a stock has performed relative to all other stocks in the market over the past 12 months. Those stocks that were in the top 50 based on relative strength got final approval. This criterion targets stocks that are being embraced by the market, while the P/S criterion ensures that you're not paying too much for them, a key combination. Exxon, with a relative strength of 85, is in the top 50, so it gets final approval from this strategy.

Chevron

Based in California, Chevron is involved in every aspect of the oil and natural-gas industry, and it is active in more than 100 countries. Over the past 12 months, it posted more than $220 billion in sales.

Chevron is another oil giant that gets approval from my O'Shaughnessy growth strategy. Its market cap is more than $195 billion, easily meeting this model's $150 million minimum, and the firm has grown its earnings per share in each year of the past half-decade, with EPS rising from $3.55 to $8.77 in that time.

In addition, Chevron's price-sales ratio is 0.89, indicating that it's selling on the cheap right now. That factor, coupled with the stock's strong relative strength of 87, is a very good sign.

Eni, Exxon and Chevron, like the rest of the oil industry, all have a number of challenges ahead of them. But these three companies have long histories of success, are leaders in their industry and have very strong fundamentals. That puts them in great position to handle whatever obstacles come their way in the coming years -- which, given their relatively low current stock prices, makes them very attractive options right now.

If you have questions or comments about the stocks mentioned in this article or about my guru stock-picking strategy, please feel free to send an e-mail.

At the time of publication, both John Reese and clients of Validea Capital Management were long all three stocks.