After slumping earlier in the week over signs of a potential global economic slowdown, oil prices rose on Wednesday after China and Japan said they will take fiscal stimulus measures to boost growth and alleviate some of the pressure on financial markets.
International Brent crude oil futures rose nearly 1% on Wednesday morning to $61.97 per barrel, while futures for West Texas Intermediate crude gained roughly half a percent to $53.29.
At the World Economic Forum in Davos, Switzerland, Chevron Corp. (CVX, Financial) CEO Michael Wirth told CNBC that while the global economy may be slacking, sales of energy and industrial products do not indicate that growth will come to a halt.
“We're not seeing signs that we're hitting any kind of a wall,” he said.
In addition, BP PLC (BP, Financial) CEO Bob Dudley told CNBC on Tuesday he expects solid demand for oil this year, growing by another 1.4 million barrels per day. He also said he thinks oil prices are “heading back into a reasonable balance” following two big overcorrections in 2018.
As a result of this outlook, investors may find value opportunities among oil and gas producers that are trading below Peter Lynch value.
A legendary investor, Lynch developed this strategy in order to simplify his stock-picking process. With the belief good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. The GuruFocus All-in-One Screener also looked for companies with a business predictability rank of at least one star and a 10-year revenue per share growth rate of at least 6%.
Oil and gas-producing companies that met these criteria as of Jan. 23 were Continental Resources Inc. (CLR, Financial), Carrizo Oil & Gas Inc. (CRZO, Financial), Evolution Petroleum Corp. (EPM, Financial) and Gulfport Energy Corp. (GPOR, Financial).
Continental Resources
The Oklahoma City-based oil and gas producer has a $17.12 billion market cap; its shares were trading around $45.53 on Wednesday with a price-earnings ratio of 10.42, a price-book ratio of 2.85 and a price-sales ratio of 3.72.
The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.
GuruFocus rated Continental Resources’ financial strength 5 out of 10. While the company has adequate interest coverage, the Altman Z-Score of 2.24 indicates it is under some pressure as its revenue per share has declined over the last five years.
The company’s profitability and growth scored a 6 out of 10 rating, boosted by margins and returns that outperform competitors, a high Piotroski F-Score of 7, which indicates operations are healthy, and a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per year.
Of the gurus invested in Continental Resources, Steven Cohen (Trades, Portfolio) has the largest position with 0.18% of outstanding shares. Michael Price (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Caxton Associates (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Ray Dalio (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) are also shareholders.
Carrizo
The energy company, which is headquartered in Houston, has a market cap of $1.09 billion; its shares were trading around $11.86 on Wednesday with a price-earnings ratio of 11.62, a price-book ratio of 1.51 and a price-sales ratio of 0.95.
According to the Peter Lynch chart, the stock is undervalued.
Carrizo’s financial strength was rated 4 out of 10 by GuruFocus. Despite having sufficient interest coverage, the Altman Z-Score of 0.07 warns the company is at risk of going bankrupt.
The company’s profitability and growth fared a bit better, scoring a 5 out of 10 rating. While the Sloan ratio of 29.64% suggests Carrizo has poor earnings quality, its margins and returns are outperforming industry peers. The company also has a moderate Piotroski F-Score of 5, suggesting operations are stable, and a one-star business predictability rank, which is on watch as a result of declining revenue per share over the last five years.
With 4.21% of outstanding shares, NWQ Managers (Trades, Portfolio) has the largest stake in Carrizo. Other gurus holding the stock are Simons’ firm, Cohen, Mairs and Power (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Greenblatt.
Evolution Petroleum
The Houston-based company, which acquires and develops properties for the production of oil and natural gas, has a $245.69 million market cap; its shares were trading around $7.41 on Wednesday with a price-earnings ratio of 10.74, a price-book ratio of 3.06 and a price-sales ratio of 5.46.
Based on the Peter Lynch chart below, the stock appears to be undervalued.
Evolution’s financial strength and profitability and growth were both rated 9 out of 10 by GuruFocus. Supported by no long-term debt and comfortable interest coverage, the Altman Z-Score of 11.13 indicates the company is in good fiscal standing.
Although the operating margin is in decline, it still outperforms 85% of competitors. The company is also boosted by strong returns, good revenue and earnings growth, a high Piotroski F-Score of 8 and a one-star business predictability rank.
Simons’ Renaissance Technologies is Evolution’s largest guru shareholder with a 5.37% stake. Caxton and Chuck Royce (Trades, Portfolio) also have positions.
Gulfport Energy
Headquartered in Oklahoma City, the energy company has a market cap of $1.49 billion; its shares were trading around $8.60 on Wednesday with a price-earnings ratio of 3.37, a price-book ratio of 0.46 and a price-sales ratio of 1.11.
The Peter Lynch chart suggests the stock is undervalued.
GuruFocus rated Gulfport’s financial strength 5 out of 10. Since the company has issued $1.2 billion in new long-term debt over the last three years, has poor earnings quality and has recorded declining revenue per share, the Altman Z-Score of 0.59 warns the company is in danger of bankruptcy.
The company’s profitability and growth fared much better, scoring an 8 out of 10 rating. In addition to having good margins and returns that outperform industry peers, Gulfport has a moderate Piotroski F-Score of 6 and a one-star business predictability rank.
Of the gurus invested in Gulfport Energy, Richard Snow (Trades, Portfolio) has the largest holding with 2.33% of outstanding shares. Other guru shareholders are Simons’ firm, Hotchkis & Wiley, Pioneer and Scott Black (Trades, Portfolio).
Disclosure: No positions.
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