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John Reese is CEO of and Validea Capital, and portfolio manager for the National Bank Consensus funds. Globe Investor has a distribution agreement with, a premium Canadian stock screen service. Try it.

If you're like most investors, the thought of buying oil stocks right about now probably gives you a sick, sinking feeling in your gut. After all, the stunning speed and strength of oil's decline has been pummelling oil-related stocks across North America. In the United States, oil and gas drilling companies' shares are down 33 per cent on average over the past three months alone, according to In Canada, funds such as the Guggenheim Canadian Energy Income ETF are down in the 25-per-cent range over that stretch.

As though that alone isn't enough to get your stomach churning, optimism that we'll have a quick bounce-back in crude prices seems to be waning. Oil firms are laying off workers, slashing budgets and cutting dividends, and many investors fear that the industry woes will leak into other parts of the Canadian economy – a fear that the Bank of Canada shares, as evidenced by its surprise decision to cut a key interest rate last week.

So, oil stocks – pass them over (and pass the Tums), right?

Not so fast. That sick, sinking feeling in your gut may be uncomfortable, but how you respond to it likely determines how successful you are as an investor. And in the dozen-plus years I've spent studying history's most successful and famous investors, I've found that the greatest minds of Wall Street don't consider such sinking feelings as a reason for panic. Instead, they consider them signs of opportunity.

That's because we human beings are emotional creatures who are prone to overreaction, particularly when our money is involved. When stock prices are surging, we get excited, sometimes even exuberant. We think prices are going to rise indefinitely, and that if we don't hop on the train we'll be left behind our soon-to-be-wealthy friends, co-workers and neighbours. And when prices are falling, we get scared. We can't see any end to the declines. We ignore things such as valuation and balance sheets. We avoid stocks altogether, or we fall prey to guilt by association – avoiding broad groups of equities even though every company and every stock is different.

Now, to be clear, I'm not an oil-industry analyst. What I am is a fundamental-focused investor who sticks to the numbers – those on a company's balance sheet and in its fundamentals. Just about all of the investment gurus I've learned from found that is a better way to go about choosing stocks than trying to predict macro trends. (Just consider how few analysts and strategists and pundits predicted the huge oil price declines we've seen over the past six months or so.)

When it comes to the oil industry today, many of the recent stock declines appear warranted – a number of oil services firms, for example, have bloated balance sheets and could face major defaults if crude prices stay low. But it also seems that investors are falling prey to the guilt-by-association mindset, too. I recently used my quantitative Guru Strategies (which are based on the approaches of Warren Buffett and other great investors) to scan the Canadian and U.S. markets and found a number of oil stocks that remain in a good financial position and have long histories of success. Nevertheless, they've been punished in the selloff just as much as oil companies with bloated balance sheets and dicey track records. While no one knows exactly when the oil fears will subside, when they do, these types of fundamentally sound, beaten-down stocks are good bets to bounce back strong. Here a few that caught my eye and are worth looking into.

Pason Systems Inc. (PSI-TSX): Calgary-based Pason ($1.4-billion market cap) provides specialized data-management systems for drilling rigs that enable collaboration between the rig and the office. The firm – which has no long-term debt – is a favourite of my Joel Greenblatt-based model. Mr. Greenblatt's approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes Pason's 10.7-per-cent earnings yield and 35-per-cent ROC, and considers the stock one of the 20 most attractive in Canada right now.

Total Energy Services Inc. (TOT-TSX): Another Calgary-based oil firm, Total ($400-million market cap) is a diversified energy services supplier that provides equipment and expertise for drilling, production, transportation and various other needs. Total is a favourite of my Benjamin Graham-based model, in part because of its strong balance sheet. The firm has a current ratio of 2.35 and more net current assets ($98-million) than long-term debt ($69-million), passing two key Graham model tests. Mr. Graham is known as the "father of value investing," so this model loves that Total is dirt-cheap, trading for just eight times trailing 12-month earnings per share and 1.1 times book value.

Helmerich & Payne Inc. (HP-NYSE): Oklahoma-based H&P ($7-billion market cap) drills oil and gas wells for exploration and production companies. It's another oil services firm with a great balance sheet – a 2.5 current ratio and $770-million in net current assets versus just $40-million in long-term debt – which helps it earn strong interest from my Graham-based model. H&P has a 10.5 price-to-earnings ratio using three-year average earnings per share. (Mr. Graham used the higher of the three-year P/E and trailing 12-month P/E) and a 1.4 price-to-book ratio, which also impress this approach.

Disclosure: I'm long HP.

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