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There are dozens of other plays like that among oil patch companies. Although it may seem like some sort of illusion, it is quite real. David Anderson, a veteran energy portfolio manager at hedge fund Palo Alto Investors in California, told me this week that "the market always takes some time to catch up to underlying fundamentals, since most investors don't believe in the sustainability of the cycle."
Anderson added: "We are not investing for the 'cycle.' We are investing in growth companies in a growth business. Energy is cyclical over certain periods, and long periods of growth occur. We could be in a growth period for energy resources, energy tech and alternative energy for 20 years. We're five years into it at this point. It all depends on the time frame you evaluate. Too many people are focused on the next quarter or the one after. We recommend that people look a bit farther out."
Expect to be surprised
That long-term view makes a compelling case for higher multiples on the energy stocks. Anderson points out that when he was born in 1962, oil was under $2 per barrel and there were 3 billion people on the planet using 21 million barrels a day of oil. We now have 6 billion people on Earth using 85 million barrels per day.So demand has quadrupled while population has doubled. That has caused oil prices to go up over 15 times, even after adjusting for inflation. So to those calling for a cyclical downturn in oil prices, Anderson asks: Which is going to decrease -- population or per capita energy use? The answer is neither until our resources give way, and that is a recipe for higher prices.
The bottom line is that oil and natural-gas explorers, drillers and service providers will blow away their earnings estimates in the second quarter even as companies in other industries falter.
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Most exploration companies got around $65 per barrel for their oil and $6 per thousand cubic meters for their gas in last year's second quarter, so even if they did no new business their revenues would double. Estimates have not kept up with commodity prices, so expect some shocking upside surprises as investors finally start to wake up to how cheap these stocks are if energy prices remain within shouting distance of current levels.
Here's a handful of the energy stocks that the MSN StockScouter system has given its top rating and that appear very cheap versus their growth prospects. I'll monitor them over the next year and let you know how they turn out.
| Company | P/E ratio | EPS* growth | May 21 closing price |
|---|---|---|---|
14.0 | 83% | $40.49 | |
8.4 | 40% | $70.74 | |
16.5 | 54% | $44.99 | |
14.4 | 60% | $40.42 | |
9.0 | 47% | $60.90 | |
26.6 | 61% | $86.37 | |
10.7 | 52% | $45.78 | |
41.1 | 48% | $53.32 | |
16.4 | 65% | $55.36 | |
19.2 | 39.1% | $103.83 | |
** | 37% | $10.71 | |
10.2 | 28% | $9.04 | |
17.9 | 27% | $84.76 | |
29.9 | 45% | 36.79 | |
*Earnings per share |
Fine print
Anderson has been a great guide for my column on energy for years. His comments most recently appeared in my April column on the Bakken Shale of North Dakota, and his recommended stocks to capitalize on new exploration there, such as Brigham Exploration (BEXP, news, msgs), St. Mary Land & Exploration (SM, news, msgs), Whiting Petroleum (WLL, news, msgs) and Continental Resources (CLR, news, msgs), have skyrocketed in the past month. He also provided some great ideas in this November 2006 column, and in this September 2005 column he recommended Range Resources (RRC, news, msgs) and Plains Exploration & Production (PXP, news, msgs).Many people will recall that a similar low-P/E argument was made for homebuilder stocks in 2006 just as they were peaking. The difference: New homes are nice to have, but they are not a necessity. Home building really is cyclical.
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Profiting from tragedyThe financial markets turn real-life tragedies into buying opportunities. Jim Jubak says this is why oil and rice rallied after the recent natural disasters in China and Myanmar.
Energy, on the other hand, is a scarce resource that is a necessity. Alternatives are being created, and conservation is being attempted, but fossil fuels remain in strong demand worldwide despite soaring prices. This is particularly so when the supply is threatened by rumors of a new war in Iran as well as by threats from producing countries, such as Saudi Arabia, to keep more of their oil for domestic needs.
Meet Markman at The Money Show
MSN Money columnist Jon Markman will be among more than 50 investing experts sharing tips and techniques at the 30th anniversary of The Money Show in San Francisco, Aug. 7-10. More than 150 free workshops will help refresh your perspective and prepare you for whatever the market does next. Admission is free for MSN Money readers.To register, call 1-800-970-4355 and mention priority code #009552, or visit The Money Show's Web site.
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