James Dennin, Kapitall: S&P basic materials companies have outperformed this year, so we looked for undervalued energy stocks. The top performers on this year's stock market so far have been stocks that investors usually avoid. Traditional oil and energy companies, heavily shorted stocks, and companies avoided by money managers are leading gains in the S&P 500. Energy stocks with low multiples have gained more than 7% this year. At the same time, growth plays in tech companies like Netflix (NFLX) and Amazon (AMZN) – last year's most popular investments – have fallen 20% or more. There are a few possible explanations for this. When valuations are a concern, other stock market plays like shorting will become more attractive. And dividend stocks that pay out profits to consumers rather than invest them in growing the company are usually seen as more stable investments. With that in mind we decided to run a screen on energy stocks in case the trend continues. We started with a universe of about 80 stocks that trade on the S&P 500 and which also operate in basic materials: mining, oil and gas, or specialty chemicals. Since this sector has been the most popular, we looked for plays that might, for some reason, have been missed by the market. Read more from Kapitall: Check out these 6 dividend champions with growing profits To do that we screened for companies that are trading at least 20% below their Graham Number. Named for pioneer value investor Benjamin Graham, the Graham Number is an approximate "fair value" for the stock based on earnings and book value. When a number trades well below its Graham Number, it might be said to be undervalued. This screen left us with 3 companies on our list. Check out the companies below and let us know what you think in the comments.
Click on the interactive chart to view data over time.1. Apache Corp. ( APA): Operates as an independent energy company. Market cap at $34.67B, most recent closing price at $88.89. Diluted TTM earnings per share at 5.5, and a MRQ book value per share value at 84.38, implies a Graham Number fair value = sqrt(22.5*5.5*84.38) = $102.19. Based on the stock's price at $85.11, this implies a potential upside of 20.06% from current levels. 2. Murphy Oil Corporation ( MUR): Engages in the exploration and production of oil and gas properties worldwide. Market cap at $10.77B, most recent closing price at $60.0. Diluted TTM earnings per share at 5.93, and a MRQ book value per share value at 46.87, implies a Graham Number fair value = sqrt(22.5*5.93*46.87) = $79.08. Based on the stock's price at $63.94, this implies a potential upside of 23.68% from current levels. 3. Rowan Companies Inc. ( RDC): Provides onshore and offshore oil and gas contract drilling services in the United States and internationally. Market cap at $3.83B, most recent closing price at $30.86. Diluted TTM earnings per share at 2.03, and a MRQ book value per share value at 39.39, implies a Graham Number fair value = sqrt(22.5*2.03*39.39) = $42.42. Based on the stock's price at $30.38, this implies a potential upside of 39.62% from current levels. (List compiled by James Dennin, a Kapitall Writer. Monthly returns sourced from Zacks Investment Research, Graham Number data sourced from Google Finance.)