Written by Danny Guttridge
There are two sides to every coin. For those holding oil stocks, the possibility of higher oil prices often means bigger stock returns, but higher oil prices also hurt consumer spending and the companies that rely on it.
In an interview with ABC's "This Week," US Treasury Secretary Timothy Geithner was optimistic on the economy's state and its ability to weather higher oil prices. "The economy is in a much better position to deal with those pressures ... because natural gas prices are down, the overall cost of energy for consumers is down," Geithner said. (via CNBC)
When asked whether the economy would go through a repeat of last year, he said "We can't tell yet. Obviously, we've got a lot of challenges ahead and some risks and uncertainty ahead. And some of those risks are, of course, Europe is still going through a difficult crisis."
Do you think Geithner's optimism is well founded?
Interactive Chart: Use the Compar-O-Matic to compare market caps for the stocks mentioned below:
Business Section: Investing Ideas
For a closer look at oil stocks that may be best positioned to benefit from higher oil prices in the future, we ran a screen on oil stocks for those that appear undervalued relative to earnings growth, with PEG below 1.
We then screened these names for those that appear undervalued relative to their Graham Numbers, which is a measure of their maximum fair value created by the "godfather of value investing" Benjamin Graham.
It is based off of a stock's EPS and book value per share (BVPS).
Graham Number = SQRT(22.5 x TTM EPS x MRQ BVPS)
The equation assumes that P/E should not be higher than 15 and P/BV should not be higher than 1.5. Stocks trading well below their Graham Number may be undervalued.
Do you think these stocks are undervalued and well positioned to benefit from continued elevation in oil prices?
Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
1. Atwood Oceanics, Inc. (NYSE:ATW): Engages in offshore drilling, and the completion of exploratory and developmental oil and gas wells. Market cap at $2.78B. Price at $41.81. PEG at 0.66. Diluted TTM earnings per share at 4.34, and a MRQ book value per share value at 26.4, implies a Graham Number fair value = sqrt(22.5*4.34*26.4) = $50.77. Based on the stock's price at $42.69, this implies a potential upside of 18.94% from current levels.
2. Baker Hughes Incorporated (NYSE:BHI): Supplies wellbore related products, and technology services and systems for drilling, formation evaluation, completion and production, and reservoir technology and consulting to the oil and natural gas industry worldwide. Market cap at $17.96B. Price at $40.86. PEG at 0.42. Diluted TTM earnings per share at 3.97, and a MRQ book value per share value at 36.03, implies a Graham Number fair value = sqrt(22.5*3.97*36.03) = $56.73. Based on the stock's price at $41.05, this implies a potential upside of 38.2% from current levels.
3. C&J Energy Services, Inc. Commo (NYSE:CJES): Provides specialty equipment services for oil and natural gas exploration and production companies in the Texas, Louisiana, and Oklahoma regions of the United States. Market cap at $884.71M. Price at $16.69. PEG at 0.28. Diluted TTM earnings per share at 3.19, and a MRQ book value per share value at 7.61, implies a Graham Number fair value = sqrt(22.5*3.19*7.61) = $23.37. Based on the stock's price at $17.03, this implies a potential upside of 37.23% from current levels.
4. Newpark Resources Inc. (NYSE:NR): Provide fluids management, waste disposal, and well site preparation products and services primarily to the oil and gas exploration and production industry. Market cap at $684.38M. Price at $7.21. PEG at 0.85. Diluted TTM earnings per share at 0.8, and a MRQ book value per share value at 5.43, implies a Graham Number fair value = sqrt(22.5*0.8*5.43) = $9.89. Based on the stock's price at $7.46, this implies a potential upside of 32.52% from current levels.
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Disclosure: Kapitall's Danny Guttridge does not own any of the shares mentioned above.