Most investors should have some exposure to the energy sector for a number of reasons. First of all, everyone uses energy, so it makes sense to hedge your own energy usage with some commensurate level of investment in your portfolio. For example, a retired investor should not just have all their money in low-yielding certificates of deposits and bonds because if the price of oil doubles in the next ten years, they will not have hedged the risk of rising energy costs. Instead of complaining about that large energy bill in ten years, energy investors could easily afford it, thanks to gains made in oil stocks.
This brings up the point that over time, inflation eventually creeps higher. The financial crisis that roiled the markets for the past couple of years, actually caused deflationary pressures for many assets, so few investors are focused on inflation. The lack of inflationary pressures due to the weak global economy has created some excellent buying opportunities for long-term investors. Making money in the markets often means you have to think one or two steps ahead. Eventually, the world economy will see growth, unemployment will drop, and demand for energy will rise along with inflation. This is the perfect time to buy undervalued energy stocks before all of this happens. Here are a few energy stocks that could double in value once demand rises. Some of these would even just about double if these stocks went back to the 52 week highs.
Halliburton Company (HAL) offers maintenance and other services to the oil and gas industry. The price of oil has remained strong around $100 per barrel, even in spite of the weak global economy. Just imagine how high oil might go when the headlines are about employees being hired, housing showing strength, and global economic growth returning. That will push the price of oil much higher which means oil and gas companies will have to drill deeper, and drill offshore, which means more demand for Halliburton's services. This company does have some exposure to the BP oil spill but a settlement could be coming soon, and the stock could rally once this issue is put aside. Buying on dips is likely to pay and from these levels the stock only needs to rise a bit past the 52 week high to double in the next couple of years.
Here are some key points for HAL:
- Current share price: $36.64
- The 52 week range is $27.21 to $57.77
- Earnings estimates for 2011: $3.97 per share
- Earnings estimates for 2012: $4.59 per share
- Annual dividend: 36 cents per share which yields 1%
Peabody Energy Corporation (BTU) is one of the largest coal companies in the world. This company is so large that it fuels about 10% of the power used in the United States. Coal stocks have been weak lately due to concerns over a potential double-dip recession. A mild Winter season has lowered demand for energy and that has put severe pressure on natural gas which is seen as being a competitive fuel to coal. Peabody is seeing high expenses in order to upgrade the MacArthur coal mine in Australia, and that could be a continued drag on earnings. However, the stock is trading for about half the 52 week high, so plenty of bad news is already priced in. It's reasonable to assume that this stock could rebound and go back to the 52 week high in the next couple of years, and that would be a double from current levels.
Here are some key points for BTU:
- Current share price: $35.46
- The 52 week range is $30.60 to $73.95
- Earnings estimates for 2011: $3.31 per share
- Earnings estimates for 2012: $4.75 per share
- Annual dividend: 34 cents per share which yields 1%
Cliffs Natural Resources (CLF) is a leading iron ore and coal mining company. The weakness in the global economy and coal pricing has started to impact financial results at Cliffs. The company recently announced that volumes and pricing would be weaker than expected and a Credit Suisse analyst downgraded the stock on that news. The pricing pressures and concerns over the global economy is likely to persist. Many investors also believe that China could see a hard-landing which would even further lower demand for coal. Because of this, it makes sense to buy only on major pullbacks. However, these issues are relatively short-term in nature and investors with a 2 to 3 year horizon could see the stock double from these levels.
Here are some key points for CLF:
- Current share price: $73.82
- The 52 week range is $47.31 to $102.48
- Earnings estimates for 2011: $13.40 per share
- Earnings estimates for 2012: $14.97 per share
- Annual dividend: $1.12 per share which yields 1.6%
Alpha Natural Resources (ANR) is a leading producer of coal with operations in the Appalachian region. It sells thermal coal to utilities and metallurgical coal to the steel industry. Concerns over weakening demand from China and lower natural gas prices have impacted earnings for Alpha. This taken the stock down to only about one-third of the former 52 week high. A small improvement in the economic data from China could boost coal prices and raise profit margins for this company. Since China's massive population base is growing exponentially, it's only a matter of time before coal demand is strong again. Longer-term investors who can accept some weakness and volatility will probably be well-rewarded when demand returns. Alpha shares could triple if it went back to the 52 week highs, so a double to about $40 even looks conservative.
Here are some key points for ANR:
- Current share price: $20.12
- The 52 week range is $15.49 to $61.66
- Earnings estimates for 2011: $2.03 per share
- Earnings estimates for 2012: 99 cents per share
- Annual dividend: none
Baker Hughes (BHI) provides drilling products and services to the oil and natural gas industry. This company has nearly $20 billion in annual revenues, a very strong balance sheet and the book value is $36.45 per share. Again, as oil companies make discoveries of oil in more remote locations and at deeper levels offshore, oil services companies like Baker Hughes will continue to see growth. Revenues are expected to grow about 15% annually. Between a couple more years of growth like that and some multiple expansion, this stock could double, trading for about $100 per share in the next couple of years. Recently, it has been possible to buy this stock for about $46 per share, so wait for dips like that before buying.
Here are some key points for BHI:
- Current share price: $49.58
- The 52 week range is $41.91 to $81
- Earnings estimates for 2011: $5.02 per share
- Earnings estimates for 2012: $5.88 per share
- Annual dividend: 60 cents per share which yields 1.2%
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
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