Here are the most efficient companies within the S&P 500's bargain-stock sector
By Philip van Doorn
The energy sector still appears to be remarkably cheap, despite outperforming all other stock sectors over the past three years
The energy sector has been the best performer among the 11 sectors of the S&P 500 over the past three years, and it remains the least expensive sector - by far - on a forward price-to-earnings basis.
And this is not only because oil prices have risen.
Based on continuous front-month contracts for West Texas Intermediate crude oil (CL00), the price per barrel has increased 28% over the past three years to $83.11.
Meanwhile, the S&P 500 energy sector has returned 128% with dividends reinvested.
Here are three-year returns and relative forward P/E valuations for the 11 S&P sectors, with the full index at the bottom. The sectors are sorted by three-year returns:
Sector or Index 3-year return Forward P/E Current P/E to 3-year average Current P/E to 5-year average Current P/E to 10-year average Energy 128% 12.7 110% 119% 68% Information Technology 50% 26.9 115% 115% 139% Industrials 27% 20.9 103% 99% 111% Consumer Staples 24% 20.1 100% 100% 103% Financials 22% 15.0 104% 101% 106% Healthcare 19% 19.1 114% 114% 116% Communication Services 18% 18.4 97% 97% 97% Materials 14% 20.3 123% 116% 122% Utilities 10% 16.1 89% 89% 93% Consumer Discretionary 2% 25.0 88% 81% 96% Real Estate -5% 16.2 84% 82% 86% S&P 500 28% 20.2 106% 104% 112% Source: FactSet
FactSet calculates P/E ratios for the S&P 500 SPX and its sectors using rolling 12-month earnings-per-share estimates.
The energy sector is trading above its three-year and five-year average P/E, as are most of the other sectors and the full S&P 500. But it is trading below its 10-year average P/E, reflecting the long slide for oil prices from mid-2014 through early 2016.
But the energy sector's forward P/E remains very low relative to all the other sectors, and after many years of management teams focusing on cautious production increases and careful capital allocation, investors may still be looking at a good long-term setup.
Energy ETF or a stock screen for quality?
If you believe that the energy sector is still attractive because of the low valuation and prospects for strong demand for oil over the next decade, the next question is how might you best play the sector?
An easy way for investors who to take a broad approach to large U.S.-listed players would be to hold shares of the SPDR Select Energy ETF XLE, which holds all 23 stocks in the S&P 500.
But some investors prefer to look at individual stocks. Within the energy sector, one way to screen for quality is to look back at average returns on invested capital.
A company's return on invested capital (ROIC) is its profit divided by the sum of the carrying value of its common stock, preferred stock, long-term debt and capitalized lease obligations. FactSet's quarterly ROIC calculation for a company is actually a 12-month look back. For three-year average ROIC, we looked at the numbers for the most recent available quarter, then four quarters previous, and so on, to average the three most recent available four-quarter periods.
ROIC indicates how efficiently a company's management team has allocated investors' capital. It is of greatest use when comparing companies in similar industries, because some industries are more capital intensive than others.
The carrying value of a company's stock may be much lower than its current market capitalization. A company's ROIC might be high because it issued most of its shares many years ago at a price much lower than the current price. If a company has issued a relatively large amount of newer shares recently, or at high prices, its ROIC will be lower. If a company has low debt, its ROIC is higher. If a company is being forced to increase borrowings, especially when interest rates are high, its ROIC will go down.
Here are all 23 stocks in the S&P 500 ranked by three-year average ROIC, as calculated by FactSet:
Company Ticker 3-year average ROIC 3-year return Forward P/E Dividend Yield APA Corp. APA 39.2% 85% 6.5 3.08% Devon Energy Corp. DVN 26.7% 193% 9.9 4.59% EOG Resources Inc. EOG 23.1% 133% 11.3 2.68% Valero Energy Corp. VLO 23.1% 164% 10.0 2.58% ConocoPhillips COP 20.1% 191% 14.3 1.78% Pioneer Natural Resources Co. PXD 18.0% 123% 12.0 4.07% Exxon Mobil Corp. XOM 17.9% 140% 12.4 3.22% Coterra Energy Inc. CTRA 16.8% 109% 13.0 2.83% Diamondback Energy Inc. FANG 16.3% 212% 10.5 1.73% Marathon Petroleum Corp. MPC 16.0% 305% 10.6 1.66% Phillips 66 PSX 15.4% 124% 11.2 3.04% Chevron Corp. CVX 14.4% 85% 12.4 3.93% Occidental Petroleum Corp. OXY 13.6% 179% 17.0 1.30% Marathon Oil Corp. MRO 12.9% 169% 9.4 1.55% Halliburton Co. HAL 12.1% 107% 10.8 1.76% Schlumberger Ltd. SLB 11.7% 97% 13.2 2.24% Hess Corp. HES 9.9% 148% 17.1 1.08% ONEOK Inc. OKE 8.7% 89% 16.0 4.89% Williams Companies Inc. WMB 6.7% 93% 21.0 4.84% Targa Resources Corp. TRGP 5.5% 262% 19.5 2.57% EQT Corp. EQT 4.3% 130% 19.3 1.55% Kinder Morgan Inc. Class P KMI 3.3% 34% 15.0 6.16% Baker Hughes Co. Class A BKR 3.2% 77% 14.7 2.56% Source: FactSet
Click on the tickers for more about each company.
The table includes dividend yields, which are calculated by FactSet by dividing the sum of dividends paid on common shares over the past 12 months by the current share prices. Several U.S. energy companies pay variable dividends, so if dividends are a factor in your investment-decision process, be sure to read up on the payout policies of any companies of interest.
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-Philip van Doorn
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04-29-24 1026ET
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