Commodity investors are often looking for an entry point for their favorite stocks, as the obvious goal of any long position is to buy low and sell high. One of the primary statistics that investors use to value a stock is its price to earnings (P/E) ratio. Often times, traders and institutions will compare a firm’s P/E ratio to the overall industry to get a good idea of whether or not a stock is over or undervalued. Though much more than just P/E comes in to play when valuing a security, we found three Oil & Gas stocks with ratios well below their peers, making them potential candidates for contrarian buys [for more commodity news subscribe to our free newsletter].
Note that the current estimate for the P/E ratio of the overall industry stretches anywhere from 10.2 to the low to mid teens, so we aimed to beat the lower end of that range.
British Petroleum (BP)
BP has been in the news for the past few years for all of the wrong reasons; the Deepwater Horizon oil spill caused quite a stir in 2010 and is still weighing on the firm today. After their most recent earnings debacle, it is clear that BP is not out of the woods, but for those looking for a contrarian buy, BP may be worth a closer look. Its stock price is currently in the low $40′s, though its pre-spill levels were in the low $60′s. The stock currently has a P/E of 7.7, putting it well below the industry average. BP’s current levels and low P/E may suggest that it is worth more than its current price, but will need to clear spill costs and settlements before it can think about charging forward [see also The Ten Commandments of Commodity Investing].
Another big name, this time from a U.S.-producer, COP has had a rough 2012. While its price had been reaching for $80, a round of bad earnings and a split of the company led to a major falling out in the stock. COP is now hovering around the mid-$50s and looks as juicy as ever with a dividend yield nearing 4.7%. Note that COP’s low stock may simply be a reflection of the split and the fact that the new company simply is not as valuable as it used to be. On the other hand, the sell-off back in May could have been exaggerated, allowing for savvy investors to get in now while the security still has room to run.
Chevron Coporation (CVX)
CVX may be the most impressive stock on this list, as it holds a market cap of over $220 billion and is already above its pre-recession levels (a feat that many stocks have not yet accomplished). The stock is currently sitting just below its 52-week high which may ward some off, but it still has a P/E ratio of just 8.34 and a healthy EPS of over 13. The stock has been trending higher since bottoming out in May and June. Chevron’s current levels certainly make it difficult to call a contrarian play, but with a lower than average P/E/ ratio and a solid track record, investors should give this mega-cap a closer look to decide if it is still sitting below its true value [see also 12 High-Yielding Commodities For 2012].
Disclosure: No positions at time of writing.