Do Stock Screeners Work? Three Inexpensive, Reliable Energy Plays

by: Larry Bellehumeur August 18, 2008 | about stocks: BP / E / ETP    

Larry Bellehumeur

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I have to admit….when it comes to using stock screeners, I'm not that experienced. I guess that I never thought that they were that useful, to be honest. Being a fundamental-type investor, I usually tended to look for companies that I had some good understanding of, based on their products being well known, or that were in an industry that I knew well. This strategy tended to work well for some guy in Omaha!

The other day, I decided to run 3 different screens through Yahoo Finance, to see what came out. For the sake of keeping my articles as short as possible, I'm going to post them in 3 different articles over the next few days.

Part One – Looking for Inexpensive, Reliable Companies

The goal is to find companies that:

  • Have produced good earnings growth over the past few years.
  • Are trading at reasonable evaluations.
  • Pay-back some of the "wealth" to the shareholders through dividends.
  • Can grow their businesses without having to borrow much money.

Search Criteria:

  1. Market capitalization over $1 billion or more. (Bigger companies tend to be more stable and more loved in turbulent times.)
  2. Forward price to earnings ratio of 14x or less. (Companies with lower P/E ratios tend to hold up better in possible Inflationary times.)
  3. Dividend yield of at least 2.5%. (Higher dividend paying stocks tend to be more conservative by nature, tend to be more stable businesses and provide you with some automatic return on your investment.)
  4. Price to book ratio of less than 2x. (Shows that the company is somewhat reasonably valued.)
  5. Return on equity of at least 25%. (Shows that the company can produce good results with its existing assets.)
  6. Earnings growth over past 5 years has exceeded 15% annually. (Company has a solid history of increasing its earnings, and likely its dividends.)
  7. Free cash flow exceeds $500 million annually. (Means that the company may not need to borrow money to grow their business, something that is important while we are still in the credit crunch.)

So, what results did I get? Prices are as of Friday's close….

BP (BP) -- $57.52

  • A multi-national oil company.
  • Will trade (like most oils) with the commodity price.
  • Down from its recent highs in May of just over $75.
  • Consensus 1-Yr targets have it reaching its old high, likely approaching $80.

ENI (E) -- $62.83

  • Yawn, another multi-national oil company.
  • Similar chart to BP….this one peaked in May at about $85.
  • Consensus 1-Yr targets have it beating its May high, approaching $90 Seagate Technology (STX).
  • I was quite surprised to get a technology stock in this search, especially one that makes items that many people (incorrectly, I might add) feel are commoditized such as disk drives / storage devices.
  • Trading at less than 10x fiscal 2009 estimated earnings, this one does look cheap.
  • Its 1-Yr consensus target price of about $22 seems reasonable.

Energy Transfer Partners (ETP) -- $43.46

  • I have to admit, I had barely heard of this company.
  • For those of you who were like me, this company focuses on natural gas transport (pipelines), processing and storage.
  • The company does sport an incredible yield of just over 8%. The company is run as a partnership**, making it different than most stocks. Its payout ratio is more like that of a REIT at 91% (according to Yahoo), but the stability of its earnings makes this more sustainable than most businesses. This is similar to many Canadian Energy Income Trusts in this space, where they pay out the vast majority of their free cash. For similar companies, check out Pembina Pipeline [PIF.UN - Toronto] and Inter Pipeline [IPL.UN - Toronto].
  • The 1-yr consensus target prices seem a bit aggressive to me ($56+), but if the market begins to value dividends more than growth, it may have a chance to reach this lofty goal.

**I'm definitely not an expert when it comes to US-based partnerships. As a Canadian, I wouldn't know all of the tax implications for Americans. Please do some research on this before looking further at a stock like this.

Part Two will focus on:

  • Smaller companies with a solid proven track record.
  • Companies producing free cash flow and earnings today.
  • Good growth prospects at a reasonable price in the near future.

Part Three will focus on:

  • Massive large caps with good growth prospects.
  • Companies who have consistently grown their earnings, yet are trading at reasonable evaluations (PEG, Price to Book).

Stock position: None.

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This article has 7 comments:

  •  
    Aug 18 06:57 AM
    Hi French guy,nice to see you again.
    I find your comments are suitable for any investor who buys big cap stocks (DOW,SP,NASDAQ)and your pics are not different from picking a Wal Mart,Boeing or Intel.
    What you advise is a stocks in energy sector that belong to an index SP500,CAC40,FTSE100 and indexing is no easy.When markets decline especially sitting in a dangerous bear hunting zone,all the best energy stocks may go down as well even if Oil/Gas can stay constant or rising.For your picks (how one can recommend such big frms everybody is familiar with) to go up Oil/Gas must rise very sharply and even if Oil/Gas will reach it's previous highs there is no guarantee your stocks will,after Gold/Silver reached new highs and went down with lower come back,Gold/Silver big caps (I don't even mention mid-small caps hat are down 60% on average) never reached it's previous highs and look where they are today.Just take a chart of your picks and compare it to Newmont Mining,Barrick Gold,Angloamerican or any other big mining stock you chose.You will see how far away it is from it's previous highs.
    The reason for it is that investors/insiders who have much to do with the companies they invest are selling some or most of their holdings.
    Already if you are experienced trader,why not to try your calls on stocks with buying futures on Crude Oil/Nat Gas,if one is a bull,futures offer better,purest and most liquid way of investing.Using normal margins if Oil/Gas will recover the profits will be derived from commodity itself,as any public company has too many insiders to feed,debt in the bank to pay interest on and other risks.
    Have a good day French honcho.
    Reply | Link to Comment
  •  
    Aug 18 09:23 AM
    244491 -- Bonjour, Monsieur....In regards to your last point, I tend to stick to safer methods, call it conservatism, if you will. I do use some Double exposure ETFs for things like Gold and Oil Prices, and have had some decent success (these are ones where you get $2 for every dollar that oil falls, if you choose to be a bear. You also have double the exposure if you are wrong).

    As for Gold, I think that the sell-off was warranted, but has also been overdone. This tends to happen when large funds take out their money from a sector....just look at what is happening in the Fertilizer area now. Nothing has changed dramatically on Potash's business, but their stock has had a major correction.

    Cheers...Larry
    Reply | Link to Comment
  •  
    Aug 18 10:02 AM
    So true on gold, but! I think we start getting a little back very soon and for a while - until Q2 09 maybe. The US government is planning on suicide this fall with all sorts of give-aways and new initiatives (a word meaning new gives to important donors).
    Reply | Link to Comment
  •  
    Aug 18 02:56 PM
    i worked out a plan for my situation.i have many high yield stocks but only 100 or 200 sh.of each. my portfolio income is app.9-10% & i cant get hurt too much as i dont own that much of each co.energy has to be transported,sometimes more,sometimes less but its a continious business.i did real well with fro & nat as no one has figured out how to pave over the ocean.so if growth is not important i feel comfortable with this long on my stocks.
    Reply | Link to Comment
  •  
    Aug 18 04:19 PM
    GoBarnettShale.com
    Reply | Link to Comment
  •  
    Aug 18 10:43 PM
    Those big oils are down on the prospect of Russian takeovers.
    Reply | Link to Comment
  •  
    Aug 22 03:42 PM
    AOAG FOR A VERY SPEC ENERGY PLAY
    Reply | Link to Comment
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