By Michael Kaye, CFA Energy has been the best-performing sector in 2005, rising 33.3% year-to-date through Aug. 12, due in large part to record oil prices, which recently climbed to almost $67 per barrel.
Within the sector, the biggest winners have been oil and gas refiners and marketers such as Valero Energy (VLO) and Sunoco (SUN), which have surged an average 58% so far this year. And Exxon Mobil (XOM) has the highest market capitalization in the stock market, at $377 billion.
OVERBOUGHT? The latest spike in oil prices has been attributed to worries about supply shortages and refining bottlenecks (see BW Online, 8/15/05, "Of Fuel and Fears"). Also, there is always concern that most of the large oil-producing countries are not the most politically stable.
Hedge funds are reportedly betting on winter shortages even though many analysts say the market can easily handle increased demand. This week, though, oil prices are taking a little breather as many traders consider the market overbought after the speculative buying binge.
While it's difficult to determine whether or not the price of oil will continue to ascend, it's not hard to determine which energy stocks have the highest margins and are returning the most to shareholders.
PICK OF THE PACK. For this week's screen, we found the following energy stocks that have both profit margins and trailing return-on-equity twice the level of the S&P 500 index. To avoid overly speculative stocks, we screened for selections that trade above $5 per share and that have market capitalizations above $1 billion. We came up these nine names:
Hugoton Royalty Trust
Lone Star Technologies
Ship Finance International
Tenaris S.A. ADS
In the U.S.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services U.S. have recommended 30.2% of issuers with buy recommendations, 57.5% with hold recommendations and 12.3% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Europe have recommended 34.4% of issuers with buy recommendations, 46.8% with hold recommendations and 18.8% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services Asia have recommended 33.3% of issuers with buy recommendations, 47.2% with hold recommendations and 19.5% with sell recommendations.
As of June 30, 2005, research analysts at Standard & Poor's Equity Research Services globally have recommended 31.0% of issuers with buy recommendations, 55.4% with hold recommendations and 13.6% with sell recommendations.
5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.
4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.
3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.
2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.
1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.
Relevant benchmarks: in the U.S. the relevant benchmark is the S&P 500 Index, in Europe the S&P Europe 350 Index and in Asia the S&P Asia 50 Index.
For All Regions:
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Readers should note that opinions derived from technical analysis might differ from those of Standard & Poor's fundamental recommendations. Kaye, an analyst for Standard & Poor's Portfolio Services, is the author of the forthcoming book The Standard & Poor's Guide to Selecting Stocks