Joel Greenblatt (Trades, Portfolio) introduced the investing world to the “Magic Formula” when he published his bestselling book, “The Little Book That Beats the Market,” in 2005. The idea behind the Magic Formula is to apply a simple mathematical formula to find profitable businesses that trade at bargain prices.
The formula ranks companies primarily based on two metrics: earnings yield and return on capital. The earnings yield, which Greenblatt defines as earnings before interest and taxes divided by enterprise value, measures how much the company earns compared to how much the stock is valued by the market. The return on capital, which is calculated as Ebit divided by the sum of net fixed assets and net working capital, measures how much a company earns compared to what it spends to produce those earnings.
As oil prices rise due to Russia’s invasion of Ukraine and the resulting economic sanctions, here are five energy stocks that rank highly on GuruFocus’ Magic Formula screener, a screener based on Greenblatt’s criteria.
Crescent Point Energy
Crescent Point Energy Corp. (CPG, Financial) is a Canadian oil company that focuses primarily on light oil production in southern Saskatchewan and central Alberta. In 2021, it acquired assets in Kaybob Duvernay and sold non-core Saskatchewan assets to reduce decommissioning liabilities.
Crescent Point has a return on capital of 50.54%, which outperforms 92% of other companies in the oil and gas industry. Its earnings yield of 46.87% is beating 96% of industry peers.
The company has a GuruFocus financial strength rating of 3 out of 10 and a profitability rating of 5 out of 10. The current ratio of 0.40 and Altman Z-Score of 0.43 show the company could go bankrupt without additional liquidity. With both the top and bottom lines on the rise and operating and net margins improving as well, the company may soon get the cash it needs.
On March 15, shares of Crescent Point traded around $6.63 for a market cap of $3.82 billion. According to the Peter Lynch chart, the stock is trading below its fair value and median historical valuation.
Obsidian Energy
Obsidian Energy Ltd. (OBE, Financial) is a Canadian oil and gas producer operating in western Canada. Formerly known as Penn West, the company underwent a rebranding in 2017. It managed to narrowly avoid bankruptcy in 2020 before recovering to acquire the Peace River Oil Partnership in 2021.
Obsidian’s return on capital is 39.21%, outperforming 89% of peers in the oil and gas industry, while its earnings yield of 38.24% is higher than 94% of the industry.
The company has a GuruFocus financial strength rating of 4 out of 10, with a distressed Altman Z-Score of 0.23 contrasting a strong Piotroski F-Score of 7 out of 9. The profitability rating is 4 out of 10 on the back of a three-year revenue per share growth rate of 2.5% and a three-year Ebitda per share growth rate of 48%.
On March 15, shares of Obsidian traded around $7.10 for a market cap of $575.16 million. According to the Peter Lynch chart, the stock is trading below its fair value and median historical valuation.
Cosan
Cosan SA (CSAN, Financial) is a Brazilian producer of bioethanol, sugar and natural gas with operations in Brazil, Argentina, Uruguay, Paraguay and Bolivia. Operating as a holding company, it is dedicated to diversifying Brazil’s energy infrastructure and improving logitstics.
Cosan has a return on capital of 52.44%, which is better than 92% of the other companies in the oil and gas energy. Its earnings yield of 14.88% is higher than 82% of industry peers.
GuruFocus gives the stock a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The Altman Z-Score is in distressed territory at 1.27, though the Piotroski F-Score of 5 out of 9 suggests financial stability. The company has a three-year revenue per share growth rate of 28.4% and a three-year Ebitda per share growth rate of 39.6%.
On March 15, shares of Cosan traded around $16.03 for a market cap of $7.52 billion. Relatively new to the public market, Cosan shares are flat since their debut in March of 2021, having dropped to near the listing price after an initial uptrend.
Vermilion Energy
Canada-based international oil and gas company Vermilion Energy Inc. (VET, Financial) operates both onshore and offshore assets in North America, Europe and Australia. Its business strategy emphasizes free cash flow generation and value-adding acquisitions.
Vermilion has a return on capital of 32.74%, which is higher than 88% of peers in the oil and gas industry. Meanwhile, its earnings yield of 24.89% is outperforming 90% of industry peers.
The company has a GuruFocus financial strength rating of 3 out of 10, with the Piotroski F-Score of 7 out of 9 indicating a strong balance sheet despite the dangerously low current ratio of 0.63. The profitability rating is 8 out of 10 on the back of the return on invested capital recently surpassing the weighted average cost of capital, which means the company is creating value for shareholders.
On March 15, shares of Vermilion traded around $20.21 for a market cap of $3.29 billion. According to the Peter Lynch chart, the stock is trading below its fair value and median historical valuation.
BP Midstream Partners
Based in Houston, BP Midstream Partners LP (BPMP, Financial) is a master limited partnership that owns and operates pipelines and other midstream assets in the U.S. as an indirectly owned subsidiary of British energy giant BP PLC (BP).
BP Midstream’s return on capital of 237.16% is higher than 97% of other companies in the oil and gas industry, while its earnings yield of 8.74% is beating 70% of industry peers.
The company has a financial strength rating of 5 out of 10 and a profitability rating of 7 out of 10 from GuruFocus. The Altman Z-Score of 3.3 and interest coverage ratio of 16.79 show a very healthy balance sheet. The operating margin of 51.33% and net margin of 111.03% are far higher than their respective industry medians of 4.53% and 2.32%.
On March 15, shares of BP Midstream traded around $16.04 for a market cap of $1.68 billion. According to the Peter Lynch chart, the stock is trading below its fair value but above its median historical valuation.
