What are we looking for?
The highest-ranking energy sector stocks as determined by the INK Edge V.I.P. criteria (valuations, insider commitment and price momentum).
This is the same approach we apply across the broad market to determine membership for the INK Canadian Insider Index, which is used by the Horizons Canadian Insider Index ETF (HII).
The screen
Our universe includes some 800 TSX-listed stocks that meet minimum size and liquidity requirements. We are looking for stocks in the sector that rank in the top 30 per cent of all stocks in the market. To make the final grade, a stock in the group must trade over $3 and have a market cap of at least $250-million.
We begin by determining a stock's rank in each V.I.P. category based on equally weighted factors.
Valuations (past 12 months except dividend yield)
- price-to-earnings, price-to-book and price-to-sales ratios;
- enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization);
- price-to-cash flow or price to cash;
- shareholder yield (buybacks plus dividends).
Insider (officer and director) commitment
- recent net insider buying;
- personal holdings (excludes shares held for other investors);
- insider intensity, based on the number of insiders buying.
Price momentum
- based on three-, six- and 12-month returns.
Next, each V.I.P. category rank is equally weighted to determine a composite ranking.
In context
The percentile V.I.P. category and composite rankings are in relation to all other stocks in the market. Rankings are between zero and 100, the higher the better.
A composite ranking over 90 goes into the top decile "sunny" outlook category. Today we are looking for the top 15 stocks in this category. However, keep in mind that even if a particular stock has a bright outlook, it could still rain on your portfolio's parade. Diversification remains key.
What we found
Despite the pounding that oil and gas stocks have endured over the past year, relative opportunity in the group remains scarce. Only seven names made the list, and one of them was Uranium Participation Corp., which we would characterize as a long-term contrarian bet on the revival of nuclear power industry globally. This issuer actually holds uranium as its key asset.
Meanwhile, Total Energy Services Inc. is the only stock in the sector with a sunny outlook. The fact that only one oil and gas stock ranks in the top 10 per cent of all stocks suggests that it might be a while before we see the group regain market leadership. For those with a high risk tolerance and patience, smaller oil and gas stocks that have financial strength might offer better bang for the buck right now over the long haul than larger names.
Investors should conduct further research before buying any of the companies listed here.
Ted Dixon, CFA, is CEO of INK Research, which provides research and alerts on insider trading reports via INKResearch.com. INK staff may also hold a position in profiled securities.