MW Energy stocks are still cheap. These 13 make effective use of stock buybacks.
By Philip van Doorn
The most important element of corporate stock buybacks is the reduction in the share count
There has been a lot of buzz about a hot stock market since Donald Trump was elected to a second term as president on Nov. 6. But the S&P 500 was up "only" 3% during the first half of November, with dividends reinvested. The prospect of an easier regulatory environment, as well as a continuing decline in interest rates, has pushed some sectors to the fore this year, especially the financial sector.
But the energy sector of the S&P 500 SPX has trailed the broad market over the past two years. The energy sector remains the cheapest relative to expected earnings, and a continued focus on efficiency and the deployment of cash through dividends and stock buybacks could make this group a compelling value play for long-term investors.
John C. Kornitzer holds seven energy stocks within the portfolio of the $479 million Buffalo Flexible Allocation Fund BUIBX, which is rated four stars (the second-highest rating) for its institutional share class within Morningstar's "Large Value" fund category.
While Trump has encouraged the oil industry to increase production, Kornitzer said he domestic producers to remain prudent, with memories of the oversupply that caused the broad drop from mid-2014 until early 2016 still fresh enough in executives' minds.
"I think the oil companies will drill according to their budgets. They will not borrow to drill. They will continue to pay cash dividends and buy back stock," Kornitzer said during an interview with MarketWatch.
Kornitzer Capital Management was founded in 1989, is based in Mission, Kan., and has 7.34 billion in assets under management, including the 10 Buffalo funds and private and institutional clients.
Still the least-expensive sector relative to earnings estimates
Before taking a deeper look at energy stocks, here is a summary of performance and forward price-to-earnings ratios for the 11 sectors of the S&P 500. The list is sorted by 2024 total returns through Nov. 15.
Sector or index 2024 return 2023 return Forward P/E Forward P/E at end of 2023
Financials 34.3% 12.1% 17.2 14.6
Communication Services 33.2% 55.8% 18.9 17.3
Information Technology 32.6% 57.8% 28.9 26.6
Utilities 28.2% -7.1% 18.2 15.7
Industrials 23.4% 18.1% 23.3 20.1
Consumer Discretionary 22.2% 42.4% 27.7 26.3
Energy 16.2% -1.3% 14.6 11.0
Consumer Staples 15.4% 0.5% 21.5 19.3
Real Estate 10.0% 12.4% 18.6 18.1
Materials 7.9% 12.5% 19.9 19.3
Healthcare 5.3% 2.1% 17.8 18.1
S&P 500 24.6% 26.3% 21.9 19.7
Source: FactSet
All total returns in this article include reinvested dividends. The forward P/E ratios are based on rolling consensus 12-month earnings-per-share estimates among analysts polled by FactSet. The P/E ratios have increased this year for all sectors except for healthcare.
One reason energy trades at the lowest P/E is that so much depends on the demand for energy, and China's economic slowdown places a drag on demand and prices worldwide. Front-month contracts for West Texas Crude Oil (CL.1) were trading at $67.29 a barrel early Monday, while Brent Crude (BRN00) was trading at $71.44.
"They cannot let the price go below $70 or $65. They need that to run their countries," Kornitzer said, referring to the OPEC+ group of oil-exporting nations. "You will not see the price go too far down, or they will cut their production. If it goes too far down the U.S. producers will cut their exploration. They are not going to lose money," he said.
On a more positive note, Kornitzer believes the second Trump administration can help spur demand for oil. "If we get the U.S. and world economies working, oil demand will go up 1 or 2 million barrels a day. [Trump] is going to cut corporate taxes for manufacturing in the U.S. and that is going to cause a lot of construction and energy use."
'Good' buybacks
Repurchasing shares will lower a company's share count, which will boost earnings per share (EPS) and hopefully support a higher stock price over time. Then again, a company's share count will increase if it shovels newly issued shares to its executives and/or members of its board of directors.
The buybacks that benefit shareholders (aside from corporate insiders) are those that lower a company's share count. These net buybacks are among the factors in the quality screens Meb Faber uses for the Cambria Shareholder Yield ETF SYLD, which has a five-star rating from Morningstar. Faber described his active stock selection strategy in this interview for the MarketWatch 50.
A long-term buyback plan can have a dramatic effect on a company's EPS over time. Apple Inc. $(AAPL)$ provides a fascinating example. An analysis in May showed that over the previous 10 years, Apple's share count had declined by 37%. A reduction in the share count of that size means a 59% boost to EPS, all other things being equal. To see how that math works, here's the same simple hypothetical example used in that article:
-- A company's profit is $1,000.
-- There are 100 shares.
-- Earnings per share came to $10.
If the share count were reduced by 10%:
-- The company's profit would still be $1,000.
-- There would be 90 shares.
-- EPS would be $11.11.
-- EPS would have increased by 11%.
S&P 500 energy stock screen
There are 22 companies in the S&P 500 energy sector. One way to invest in the entire group is by owning shares of the Energy Select Sector SPDR ETF XLE, which holds all the stocks in the sector weighted by market capitalization. This means Exxon Mobil Corp. $(XOM)$ and Chevron Corp. $(CVX)$ together make up 38% of the portfolio.
Within the S&P 500 energy sector, Kornitzer holds shares of Exxon, Chevron, ConocoPhillips $(COP)$, APA Corp. $(APA)$ and Schlumberger Ltd. $(SLB)$ in the Buffalo Flexible Allocation Fund. The fund also owns shares of Shell PLC $(SHEL)$ and Hess Corp. $(HES)$.
Hess agreed to be acquired by Chevron in October 2023, however, Exxon and China National Offshore Oil Corp. have both claimed the merger would allow them to increase their stakes in the offshore-drilling project in Guyana. Third Bridge analyst Peter McNally said late last month he expected arbitration of the dispute to be settled in mid-2025.
Getting back to buybacks, these 12 companies in the S&P 500 energy sector have shown the largest declines in quarterly average share counts (which are used to calculate EPS) over the past year:
Company Ticker One-year change in Share Count Dividend Yield Forward P/E 2024 return 2023 return Marathon Petroleum Corp. MPC -16.2% 2.31% 15.9 8% 31% Valero Energy Corp. VLO -8.9% 3.05% 14.5 10% 6% Marathon Oil Corp. MRO -6.6% 1.54% 12.3 20% -9% Phillips 66 PSX -6.4% 3.51% 13.8 1% 33% Chevron Corp. CVX -3.7% 4.04% 14.1 12% -14% ConocoPhillips COP -3.0% 2.78% 13.8 -1% 2% EOG Resources, Inc. EOG -2.6% 2.90% 12.0 15% -2% Devon Energy Corp. DVN -2.5% 3.20% 8.2 -13% -22% Halliburton Co. HAL -2.3% 2.29% 9.5 -17% -6% Targa Resources Corp. TRGP -2.3% 1.53% 25.8 131% 21% Coterra Energy Inc. CTRA -1.8% 3.28% 9.4 4% 9% Baker Hughes Co. Class A BKR -1.8% 1.96% 16.8 29% 19% Source: FactSet
Marathon Oil Corp.'s $(MRO)$ pending acquisition by ConocoPhillips is expected to be completed before the end of the year. This deal has no effect on Marathon Petroleum Corp. $(MPC)$, which tops the list and is a refiner whose business was separated from MRO in 2011.
The list includes trailing dividend yields, as calculated by FactSet. If selecting individual stocks, be careful when considering dividend yields. Some companies, especially in the energy sector, pay variable quarterly dividends. For example, Devon Energy Corp. $(DVN)$ currently pays a fixed quarterly dividend of 22 cents a share, plus a variable dividend. During the third quarter, Devon's variable dividend was 22 cents, for a total payout of 44 cents a share. For the fourth quarter, Devon will pay no variable dividend, so the full payout will be 22 cents.
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November 23, 2024 08:20 ET (13:20 GMT)
MW Energy stocks are still cheap. These 13 make -2-
In case you are wondering, since Kornitzer is holding Shell, which is based in the United Kingdom and isn't included in the S&P 500, that company's quarterly share count has declined 6.2% over the past year, and its American depositary receipts have a trailing dividend yield of 4.20%, according to FactSet.
Here is the list again, in the same order, with Shell added at the bottom, for a summary of analysts' opinions about the stocks:
Company Ticker Share "buy" ratings Share neutral ratings Share "sell" ratings" Nov. 15 price Consensus price target Implied 12-month upside potential
Marathon Petroleum Corp. MPC 55% 40% 5% $157.52 $174.06 10%
Valero Energy Corp. VLO 65% 30% 5% $140.16 $153.53 10%
Marathon Oil Corp. MRO 41% 54% 5% $28.59 $30.82 8%
Phillips 66 PSX 66% 29% 5% $130.91 $144.50 10%
Chevron Corp. CVX 68% 32% 0% $161.42 $169.73 5%
ConocoPhillips COP 73% 27% 0% $112.32 $134.83 20%
EOG Resources, Inc. EOG 47% 53% 0% $134.56 $143.90 7%
Devon Energy Corp. DVN 62% 35% 3% $38.47 $51.96 35%
Halliburton Co. HAL 82% 18% 0% $29.69 $38.13 28%
Targa Resources Corp. TRGP 88% 8% 4% $196.04 $196.34 0%
Coterra Energy Inc. CTRA 86% 14% 0% $25.58 $32.48 27%
Baker Hughes Co. Class A BKR 79% 21% 0% $42.94 $44.73 4%
Shell PLC SHEL 79% 21% 0% $65.47 $82.60 26%
Source: FactSet
Click on the tickers for more about each company.
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