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What are we looking for?

North American-listed stocks benefiting from a rebounding energy sector.

The decline in the performance of this sector over the past year is no surprise. The Energy Select Sector SPDR Fund (XLE) is down 38 per cent year-to-date. Have we seen the bottom? Over the past month, energy has outperformed every other U.S. sector, returning 19.6 per cent.

The screen

We will use Trading Central Strategy Builder to search for North American-listed energy stocks that are fairly valued against their peers, in anticipation that the rebound in the depressed energy sector continues.

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We begin by setting a minimum market capitalization threshold of US$1-billion to focus on more established energy companies in our screen.

Next, we screen for energy stocks that have a price-to-earnings ratio less than or equal to the S&P 500 P/E, currently at 28.2, in order to find energy companies showing decent value relative to the broad U.S. market. We will also require a price-to-cash-flow ratio that is at or below the S&P 500 energy sector average of 7.8, as it is harder for a company to manipulate its cash flow numbers than its earnings per share numbers.

Finally, we are interested in companies that show an operating margin of 10 per cent or greater. Operating margin is a measure of how much profit the company makes on each dollar of core revenue. Higher operating margins are preferred.

We have also included dividend yield as well as year-to-date and one-year total returns for your reference.

More about Trading Central

Trading Central is a global leader in financial market research and investment analytics for retail online brokers and institutions. Its product suite provides actionable trading ideas based on technical and fundamental research covering stocks, exchange-traded funds, indexes, forex, options and commodities. Strategy Builder, our stock screener, is available through leading retail brokers in Canada and worldwide.

What we found

Topping our list is the largest NYSE-listed independent crude oil tanker company in the world, Euronav NV. The company, headquartered in Antwerp, has the lowest P/E and price-to-cash-flow ratios on our list at 2.5 and 1.6, respectively. Operating margin is also the highest, at 49.7 per cent.

TC Energy Corp. focuses on natural gas transmission and power services. The company has the largest market cap on our list at $52-billion and the second-highest operating margin at 44.3 per cent.

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Cosan Ltd. is a Brazilian renewable energy company with shares listed on the NYSE. The company manufactures sugarcane ethanol. Cosan is the only company on our list with a positive return over the past 52 weeks, at 3.1 per cent.

Note that Euronav and Frontline Ltd. show extremely high dividend yields of 20.4 per cent and 30.1 per cent, respectively. Our selection criteria did not include a specific payout requirement owing to the abnormally high yield average that’s currently indicated in the energy sector. Even though both companies have been able to maintain their dividends this year, there is no guarantee that they can sustain their distributions indefinitely; caution is advised when investing in high-yield dividend stocks.

The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.

Select North American-listed energy stocks 

RankCompanyTickerMkt. Cap. ($ Bil.)*P/EPrice/CFOper. Margin (%)Div. Yld. (%)1Y Ttl. Rtn. (%)YTD Ttl. Rtn. (%)Recent Price ($)*
1Euronav NVEURN-N1.72.51.649.720.4-26.6-35.27.99
2Frontline Ltd.FRO-N1.32.82.142.230.1-38.9-48.36.63
3TC Energy Corp.TRP-T52.911.67.444.35.9-19.4-20.954.61
4Pembina PipelinePPL-T17.119.37.627.88.2-34.9-35.830.80
5Ecopetrol SAEC-N22.416.07.721.07.7-36.2-41.811.60
6Cosan Ltd.CZZ-N4.213.33.721.60.63.1-22.517.53
7Inter Pipeline Ltd.IPL-T5.417.86.425.23.9-44.8-45.612.27

Source: Trading Central

*Price and market cap figures in USD or CAD, depending on exchange listing. 

Gary Christie is head of North American research at Trading Central in Ottawa.

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