Value Investors, Look No Further for Your Next Big Play
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There’s a lot of valuation handwringing in the markets lately.
Prophetic bears say “stocks are expensive.” But as usual, that’s not the whole story.
While some pockets of the market are pricey, a few stocks are dirt cheap… And even better, few pundits are even discussing them.
So let’s drill down on one of the biggest value plays in the market: Energy stocks.
As I’ll show you, not only are these stocks inexpensive, but they sport fat yields… offering a huge incentive for holding them.
I’ll even include a bonus top-tier company for you to add to your watch list.
Let’s dive in!
2024’s Forgotten Treasure
Warren Buffett famously taught us that price is what you pay, value is what you get.It’s true! So often new investors focus their attention on share prices for insights, when they should be researching the fundamental drivers.
One of the most reliable ways to value a company is via the price-to-earnings (P/E) ratio. This number shows how much you receive in earnings relative to the share price, expressed as a multiple. The lower the number, the more you get for what you pay.
With the S&P 500 richly trading at a P/E of 20.56, the energy sector is priced at a rock-bottom valuation of 12.7.
When you contrast this with the Information Technology group, the value jumps off the chart. Technology stocks sport a forward P/E of 28:
On this valuation basis alone, you could be inclined to see this area as a value trap. After all, sometimes sectors are cheap for a reason.
But you’d be wrong.
Hidden inside these low valuations for oil and gas stocks is the fact that they pay some the biggest dividends in the business. This is critical because we know that dividends are responsible for 40% of the market’s gains over the long-term.
With a sexy average yield of 3.37%, second only to Utility stocks, Energy names offer 150% more income than the S&P’s 1.34% take.
As the Fed nears interest rate cuts, you can bet that yield-hungry investors will be hunting in the energy patch for an income replacement:
Up to this point we can see that valuations are solid: check.
AND we’re getting handsomely compensated for owning energy stocks: check.
Now, what’s left to do is bite into a top-notch play for your portfolio.
One Top-Tier Energy Stock to Hold in 2024
Back in October, I professed my love for Energy stocks. I gave you the Energy Select Sector SPDR ETF (XLE) as a way to play the group.Today, we’ll sift out one of the best stocks in that basket: Diamondback Energy (FANG).
This West Texas Permian Basin player checks the box both fundamentally and technically.
On the former, the forward P/E of FANG sits in the bottom of the bucket at 9.6. Not only that, but it pays a forward yield of 1.9%, which has been growing year after year.
Those are only a couple of FANG’s attractive fundamentals. And those are just the ones you can find on the company’s financial statements.
One metric you can’t find is the Quantum Score — Jason Bodner’s composite measure of momentum, underlying company quality, and institutional money flows.
On this metric, you want to buy stocks in a range between 70 and 85. This is the “Goldilocks zone” where conditions aren’t too hot or too cold — an excellent entry point.
Sizing the company up with the Quantum Score, it spits out a rank of 82.8 for FANG. Included is a juicy 75 fundamental score, which is top notch:
And it gets better. The technical action mimics the fundamental drivers. The Quantum Score includes a very healthy 88% technical score.
That tells you investors have been rewarded for holding this high-quality company. One look at the one-year chart of FANG showcases this beautifully.
Diamondback has nearly doubled the S&P 500, returning a dividend-reinvested gain of +62% vs. +33% for the market:
So there you have it. Valuations and dividend yield make energy uber attractive right now.
And value investing isn’t down and out like many proclaim… Many of the best value stocks are actually crushing the S&P 500.
Consider sinking your teeth in Diamondback (FANG) as a way to get solid value in a richly elevated stock market.
Finally, this post illustrates the power that data provides to your portfolio. If you’re looking for other top-ranking Energy plays — look no further than a TradeSmith subscription.
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily