Lynch and O'Shaughnessy Style Energy Picks

In his latest column, Validea CEO John Reese says his Guru Strategies are finding some big bargains among big oil companies, many of which have lagged the market in recent years.

“A few factors are likely at play in the underperformance of energy stocks,” writes Reese. “For one, while the U.S. seems to have gotten its economic footing, the global nature of many of the bigger energy companies still makes them quite prone to economic troubles in other parts of the world, like Europe. In addition, as years pass, it gets harder and harder — and pricier and pricier — to extract oil and gas from the ground, a drag on profits and thus on stock prices.”

But Reese says investors have punished energy companies too severely. “While many of these companies’ profits grew to unsustainable levels during the housing-bubble-fueled boom years of the mid-2000s, they have now normalized into decent, sustainable levels, but investors aren’t willing to pay much for those profits,” he says. “The integrated oil and gas industry’s average price/earnings ratio is just 9.8, while its price/sales ratio is a very reasonable 0.8 — and the average dividend yield in the industry is 4.5%.”

Reese says energy companies also provide some inflation protection, in case the Federal Reserve’s money-printing binge triggers inflation at some point. He looks at five energy firms that get high marks from his models, each of which is based on the approach of a different investing great. Among them: Royal Dutch Shell, which gets approval from his Peter Lynch- and James O’Shaughnessy-based models.