NEW YORK (TheStreet) -- With oil prices up recently after a six-month slide, is it time to reconsider taking a flier on some riskier, volatile energy stocks?
Obviously, the driver of these companies is the price of oil. Since hitting a low of $47.72 in March 2015, the price of oil has moved up to the $60-range in April and so far in May to about $67.
Some say that the price of oil has already bottomed, meaning there are many oil companies that stand to gain as the price rises and stabilizes. The market may be signaling that the price of oil is headed to its 10-year average of about $80.
High volatility means higher risk, and investors should require a higher rate of return to compensate them for the higher risk.
So, what are the best energy companies with high volatility investors should be buying? Here are the top three poised for a solid rate of return, according to TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which large-cap energy companies with high volatility made the list. And when you're done be sure to read about which big tech companies to buy now. Year-to-date returns are based on May 13, 2015 closing prices. The highest-rated stock appears last -- read more to see which one is No. 1.PSX data by YCharts
3. Phillips 66 (PSX)
Market Cap: $43.5 billion
Volatility, according to Street Ratings: 1.78
Year-to-date return: 12.6%
Phillips 66 operates as an energy manufacturing and logistics company. It operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S).
"We rate PHILLIPS 66 (PSX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, notable return on equity and impressive record of earnings per share growth. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The current debt-to-equity ratio, 0.41, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.13, which illustrates the ability to avoid short-term cash problems.
- The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market on the basis of return on equity, PHILLIPS 66 has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
- PHILLIPS 66 has improved earnings per share by 21.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, PHILLIPS 66 increased its bottom line by earning $7.12 versus $5.91 in the prior year. For the next year, the market is expecting a contraction of 6.4% in earnings ($6.67 versus $7.12).
- PSX, with its decline in revenue, slightly underperformed the industry average of 37.8%. Since the same quarter one year prior, revenues fell by 47.2%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
- You can view the full analysis from the report here: PSX Ratings Report