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Sydnee Gatewood
Sydnee Gatewood
Articles (1404) 

2 Energy Stocks to Consider as Oil Prices Rise on Trade Talks, Supply Cuts

These companies are trading below Peter Lynch value

January 08, 2019 | About:

Spurred higher by ongoing trade negotiations between the U.S. and China as well as OPEC supply cuts, oil prices rose slightly on Tuesday morning.

According to CNBC, futures for International Brent crude gained 1.5% to $58.21 per barrel, while West Texas Intermediate crude oil futures swelled 1.6% to $49.28 per barrel.

As a result, value investors may find good opportunities among energy companies that are trading below Peter Lynch value.

The renowned investor developed this method in order to simplify his investment process. With the belief good, stable companies eventually trade at 15 times their annual earnings, Lynch set the standard at a price-earnings ratio of 15. Stocks trading below this level are often good investments since their share prices are likely to appreciate over time, creating value for shareholders. In addition, the GuruFocus All-in-One screener looked for companies that have business predictability ranks of two or more stars and have seen their revenue per share grow by at least 6% over the last decade.

Based on these criteria, the screener found Energy Transfer LP (NYSE:ET) and Holly Energy Partners LP (NYSE:HEP) are good potential candidates for investors in 2019.

As of Jan. 8, both companies also met the requirements of the Joel Greenblatt (Trades, Portfolio) Magic Formula screener.

Energy Transfer

The Dallas-based midstream oil and gas company has a $37.82 billion market cap; its shares were trading around $14.45 on Tuesday with a price-earnings ratio of 12.45 and a price-sales ratio of 0.32.

The Peter Lynch charts suggests the stock is undervalued since it is trading below its fair value.


GuruFocus rated Energy Transfer’s financial strength 4 out of 10. As a result of issuing $6.8 billion in new long-term debt over the last several years, the company now has inadequate interest coverage. In addition, the Altman Z-Score of 1.10 indicates the company is at risk of going bankrupt as its revenue per share has steadily declined over the last three years.

The company’s profitability and growth fared much better, scoring an 8 out of 10 rating. Although the operating margin is expanding, which is usually a good sign, it still underperforms 72% of competitors. Energy Transfer is also supported by a moderate Piotroski F-Score of 6, which suggests operations are stable, and a business predictability rank of 4.5 out of five stars. GuruFocus says companies with this rank typically see their stock prices gain an average of 10.6% per year.

Of the gurus invested in Energy Transfer, David Tepper (Trades, Portfolio) has the largest stake with 0.17% of outstanding shares. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Leon Cooperman (Trades, Portfolio), T Boone Pickens (Trades, Portfolio)’ BP Capital, Ron Baron (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) are also shareholders.

Holly Energy Partners

The midstream energy company, which is also headquartered in Dallas, has a $3.2 billion market cap; its shares were trading around $30.39 on Tuesday with a price-earnings ratio of 12.82, a price-book ratio of 7.16 and a price-sales ratio of 6.07.

According to the Peter Lynch chart, the stock is undervalued.


As a result of issuing new long-term debt over the last three years, Holly Energy’s financial strength was rated 5 out of 10 by GuruFocus . In addition, the Piotroski F-Score of 1.91 indicates the company is under some fiscal pressure.

The company’s profitability and growth scored an 8 out of 10 rating, boosted by operating margin expansion, strong returns and a high Piotroski F-Score of 7, which suggests business conditions are healthy. The company also has a four-star business predictability rank, which is on watch as a result of declining revenue per share over the last 12 months. According to GuruFocus, companies with this rank typically see their stock prices gain an average of 9.8% per year.

Pickens’ firm is the only guru invested in the stock, holding 0.1% of outstanding shares.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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