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Nine stocks in the battered energy sector with strong operating margins

By

Gary Christie

on

May 11, 2020

WHAT ARE WE LOOKING FOR?

The energy sector remains the worst performing sector year-to-date with the Energy Select Sector SPDR Fund (XLE) down 36 per cent. Interestingly, over the past month the sector has rebounded an impressive 16 per cent, outperforming consumer discretionary and technology stocks over that period. The energy sector has a current price-to-earnings ratio of 15.3 compared with 19.7 for the S&P 500, which indicates good relative value in a sector that may be on a rebound. Our research desk put Trading Central’s research tools to work in order to find energy companies (which includes energy infrastructure names) benefiting from an oil price rebound off of historic lows.

THE SCREEN

We will be using Trading Central Strategy Builder to search for U.S.-listed stocks that are fairly valued against their peers in a rebounding energy sector.

We begin by setting a minimum market capitalization threshold of US$1-billion to focus on larger, more established energy companies.

Next, we screen for energy stocks that have a P/E ratio that is less than the S&P 500 in order to find undervalued energy companies relative to the broad U.S. market.

Finally, we want energy companies that have positive cash flow growth and an operating margin of 10 per cent or greater. Operating margin is a measure of how much profit the company makes on each dollar of core revenue. Higher operating margins are preferred.

We have also included dividend yield, year-to-date and one-year share price performance for your reference.

MORE ABOUT TRADING CENTRAL

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.

WHAT WE FOUND

Topping our list is TC Energy Corp., an energy infrastructure company with pipeline and power generation assets in Canada, the United States and Mexico. The company has the highest operating margin on our list at 45.3 per cent as well as the best (or least worst) year-to-date performance of minus 11.5 per cent. The stock has rebounded more than 45 per cent off its lows in March and continues to outperform the S&P 500.

Calgary-based Enbridge Inc. is an energy generation, distribution and transportation company. Its pipeline network consists of the Canadian mainline system, as well as regional oil sands and natural gas pipelines. The company has the highest market cap on our list at US$65.6-billion. In Thursday’s first-quarter earnings announcement, Enbridge announced spending cuts as a result of the decline in oil demand. Approximately $1-billion (Canadian) of capital spending will be delayed as physical distancing measures affect its construction schedules. Earnings for the quarter were largely positive, beating analyst estimates.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Gary Christie is head of North American research at Trading Central in Ottawa.

The investment ideas presented here are for information only.  They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing. Learn more.

Gary Christie

Head of North American Research
Gary has over 15 years in financial markets. Prior to joining TC, he served as an equity & derivatives specialist with TD Bank and Bank of America. Gary is regularly quoted in Bloomberg News, conducts many education and market outlook webinars for investment institutions all over the world and has been a guest speaker at the New York Traders Expo.
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