Bottom Fishing In The Oil Patch?

Oil stocks have taken a massive tumble over the past month. I beleive that oil prices will revert back to $90 per barrel within 3 years. Some babies have been thrown out with the bathwater. I am looking for high-quality names selling for bargain prices. Screening for stocks with high return on equity and low price to earnings multiple have generated some ideas for investing within the beaten down sector. It feels much better to buy stocks while they’re rising. But it’s usually smarter to buy after they have fallen. My best investing has been done whenever I have been terrified.

We have seen this movie before. The last time I looked, we are still living in a petroleum-based economy. And as far as I know oil is getting more expensive to find and pump. Earlier this year most analysts were expecting oil prices to remain in the three digits. Big oil users such airlines had extensive hedging programs as did many oil producers. Now with this unexpected price shock both sides of the hedges are unwinding, and prices are overshooting. Panic stricken insitutional investors have given us some good bargains in the stock market.

To look through the rubble of the oil crash, I devised a simple strategy. First, I want to know that the business has a track record of efficiently using the money I and/or other investors have given it to generate as much in profits as it can. Second, I want to know that, when possible and appropriate, the business is selling at a reasonable price.

In other words, I like to see a company have a high return on equity (ROE) and low price to earnings (P/E) ratio. Using theGurufocus.Com stock screener, I looked for companies over 500 million in market capitalization, selling at a P/E of less than 20 and with a return on equity of more than 20. I then fed the data into Tableau public software to generate the following visualization. The stock symbols are arranged in 2 dimensions with ROE on the Vertical (Y) axis and the P/E of the Horizontal (X) axis. The colors of the circles denote the Gurufocus Financial strength –Â all stocks are "green" showing decent to good financial strength. The size of the circle shows the market capitalization. Exxon Mobil (XOM) stands out as the 800-pound gorilla of the patch.

Here is a tabular view of the data presented above.

The figure below is a composite chart which adds "10 Year Median ROE" and "% below 12 month high." For example looking at XOM, its obvious that the ROE has been consistently between 20% to 30% and that it has now fallen around 10% from its high (stock prices are from Dec 19th, 2014). Seadrill by the same token has fallen over 60% from its high.

Please note that this screen only covers the U.S. and Canadian markets. Of course be aware that this may be a false bottom and we may re-test the lows. Be sure to research these ideas and Happy Fishing over the Holidays.