Time For An Oil Rebound?

After oil prices began their dramatic plunge in the summer of 2014, many oil stocks became persona non grata in the investment world. Now, nearly two years later, a number of these beaten-down energy companies look like good bets to rebound, says Validea CEO John P. Reese.

Reese says that the oil price declines created a tricky situation for value investors. “We value investors look at the numbers on the page and decide whether a company is trading at an attractive valuation or not,” he writes in a recent Forbes.com column. “But just because a stock is cheap, that doesn’t mean it will start going up right away. Good, cheap stocks can get much cheaper as emotions such as fear or apathy cause investors to stay away from them.”

“But with the energy stock collapse, something else was going on, too,” Reese continues. “In many cases, the numbers on the page weren’t reflecting reality. Valuation metrics like the price/earnings and price/sales ratios are usually calculated using the company’s earnings or sales over the past 12 months. In fact, most of the investment greats upon whom I base my Guru Strategies preferred trailing earnings and sales to projected figures, because analysts so often miss the mark in their projections. The problem is that, when oil prices fell so sharply so quickly, it materially affected oil and gas firms’ ability to produce earnings, making their trailing numbers somewhat of an illusion. Now, we’ve had nearly two years since oil prices started falling, and about a year and a half of them being under $60 a barrel. In other words, much lower prices are now baked into companies’ trailing 12 month fundamentals. We can be more confident that a firm trading at a low P/E or P/S ratio is indeed a good value.”

Reese uses his “Guru Strategies” – each of which is based on the approach of a different investing great – to highlight some oil stocks that he thinks are in good position going forward. Among them: Phillips 66, which gets high marks from his Peter Lynch-based strategy.