It always amazes me how hard energy stocks get hit when the market gets nervous. That dynamic has been on display for the last few months, with investors dumping energy stocks by the boat load on concern over slower growth, or even worse, an economic contraction.
The thinking goes that slower growth means sharp declines in demand for energy resources like crude and gasoline, therefore pushing estimates and earnings lower. Under normal circumstances that might be true, but the energy market is anything but normal.
Supply Limited
The relationship between supply and demand is already incredibly tight as existing crude reserves below the ground become more difficult to extract and consumption ticks higher on emerging market growth. That means even marginal demand growth has a serious impact on supply and prices.
Is Consumption Elastic?
Here's another thing to consider. How elastic is energy consumption? Even if the domestic or global economies fall back into a recession, does that mean people will stop driving their cars and heating their homes? Absolutely not. Energy is one of the last places anyone can afford to pull back on because it's an essential component of everyday life.
Inflation
And don't forget the inflation component. With the Fed committed to a long-term strategy of devaluing the Dollar to stimulate exports and the economy, hard assets become a bastion of safety and wealth preservation. Crude is at the top of that list.
But investors don't seem to care about that right now, because energy stocks are one of the worst performers of the last two months on profit taking and sector rotations. And it has created incredible opportunity, with more than a few good stocks trading at historically low valuations. Here are four of the best.
Top 4 Cheap Energy Stocks
Apache Corp looks insanely cheap right here, trading at 7X forward earnings, just a touch above its all-time low of 6X. That's because shares have taken a nose dive over the last few months, falling from $134 to $80 in the weak market. But that 40% decline comes as the current-year estimate is down 27 cents to $11.84. Get out your calculator, that's a 2.23% decline. The divergence pattern between shares and earnings is a buying opportunity. As you can see below, shares have taken a real beating.
Baker Hughes has also been weak, falling from $81 to as low as $42. But in the meantime, estimates have ticked higher, with the current year now up to $4.37. That means BHI's forward PE of 11 is half its median over the last ten years of 22X. As you can see below, BHI is trading well below its range from before the financial crash. Take a look.
Stone Energy is another rare stock that has seen its share price fall while estimates and earnings have remained mostly the same. That has SGY trading deep into value territory, with a ridiculous forward P/E of 4.8X.
Haliburton is another energy stock trading deep into value, with a 2012 P/E of 7.5X. With a median P/E of 18X over the last ten years and low of 6.2X, HAL is trading at a deep discount to history. Take a look below.
The Take Away
Energy stocks are currently trading at historically low valuations. That provides a unique buying opportunity for anyone bullish on energy.
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