Energy Stocks are very inexpensive right now

Energy Stocks are a Good Buy Today
by Alfonso Colombano.

As you may all have seen in the news, Warren Buffett increased his investment in ConocoPhillips.
Warren Buffett uses what's called Value Investing. Value investing consists of buying good quality companies at very cheap prices (think about it as getting $1 bills for 10 cents!) Moreover, Warren's average holding period for a stock, in his own words is "Our favorite holding period is forever."

Energy stocks, especially large cap companies, are being sold for fire-sale prices. For example, ConocoPhillips is selling below book value (market cap is $70.65billion vs. book value of $92.8 billion). Usually companies sell many times above book value (remember that US GAAP uses historical cost) Because these assets were bought many years ago, if you can find a company that is selling below book value, then it's very undervalued (because of inflation, these assets today are worth much more than when they were bought)

Another measure of undervaluation in energy stocks is market cap divided by proved reserves. Currently ConocoPhillips has 10.6 billion of BOE(barrels of oil equivalent), roughly selling for $6.66 per barrel! ExxonMobil is selling for $5.35 per BOE! This is not unique to these stocks, but it's a sector wide phenomenon. For more info on this, click here

Price Earnings Ratio (commonly called P/E ratio) for energy stocks are, I would say, near historically lows (For example, Exxon was selling close to 36 P/E in 2000). The lower the P/E ratio, the more undervalued a company is. COP is selling for a P/E of 3.89. In comparison the avg. P/E for the Dow Jones Industrial average is roughly 13. During the tech bubble, companies were selling at P/E ratios of 40 or even higher. Even if earnings were to go down, say 50% down because of lower crude prices, P/E ratios would still be extremely low.

Moreover, dividend yields, a measure of undervaluation, are at an all time high for energy companies. Again, COP has a 4% dividend yield. Shell and BP have dividend yields of 6% or higher right now. For smaller companies or energy trusts, dividend yields are in the range of 20% upwards.

Lastly, the vast majority of energy stocks have excellent operating cashflows and higher than average cash balances compared to other sectors. In other words, most of these companies do not depend on credit to fund their day-to-day operations.

To finish this article, I would like to share with you some of Warren's quotes:

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. "

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. "

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price. "

Agree, disagree? Drop me a line