These 2 Integrated Oils Are Bargains

07/07/2011 8:30 am EST

Focus: STOCKS

Richard Band

Editor, Profitable Investing

All the talk of a 2008 repeat is overblown, so it's time to do some bargain hunting, says Richard Band of Profitable Investing.

Last year, trading volume in declining stocks exploded during May and June. On the NYSE, we had 11 sessions with more than 1.3 billion shares traded in stocks whose price was skidding.

The flash crash of May 6, 2010 generated spectacular downside volume of 2.5 billion shares. Since the most recent pullback began, only one day has recorded more than a billion shares on the downside: June 1, with 1.1 billion.

I could multiply examples, but you get the point. The market isn’t imploding à la 2008. We just experienced an ordinary, garden-variety “correction” designed by Mother Nature to reel in some of the misplaced speculative gains of the past year.

The process may take a few more weeks to complete. However, we’re not far from an important bottom. Then the blue-chip indexes will scamper off to new highs for the year, probably late in the third quarter or sometime in the fourth.

Given what I’ve said so far, it should be obvious that I’m snapping up stocks myself—and I urge you to do the same. But what should you buy?

One of the beauties of a broad-market pullback is that it enhances your returns, going forward, on many different names. Thus, if you’re looking to put a lot of money to work quickly, this is a perfect time to buy well-managed mutual funds.

Some of us, though, prefer to buy individual stocks, if only to keep a little more control over what we own.

This month, I’m pleased to report that a number of our oil-and-gas stocks have backpedaled into an attractive buying range. My favorites include:

Chevron (CVX)
This integrated oil fits in almost any investor’s portfolio. CVX pays a nice dividend, of course (3.1%), and the company has sweetened its payout for the past 24 years in a row. But the real reason to own CVX is that it’s a growing business with a built-in inflation hedge (wealth in the ground).

Chevron’s output of oil and natural gas has grown 9% over the past two years—a remarkable accomplishment for such a giant ($200 billion a year in sales) enterprise. What’s more, the stock is now compellingly cheap, at less than eight times estimated 2011 earnings.

I figure the stock could appreciate 30% or more to fair value, based on the current $92 per barrel price of crude. [The rise in crude since Band wrote this likely boosts this potential even more. The stock has risen 5% over the last ten days, trading just under $105 midday on Wednesday—Editor.]

Total (TOT)
Headquartered in Paris, TOT boasts a significant advantage over US energy companies: Prices for crude oil and natural gas tend to be higher in Europe and the Far East.

During the first quarter, for instance, TOT peddled its gas for an average price of $6.19 per million BTUs, compared with the Louisiana benchmark of $4.11.

Higher prices mean higher profits for TOT—and higher dividends for us as shareholders. For the past three years, TOT has held its semiannual dividend steady (at 1.14 euros) as the price of oil first boomed, then plummeted, then recovered.

However, management has stated a goal of paying out 50% of profits as dividends, so an increase may be on the way. The current yield stands right around 6%. As with CVX, I peg the stock’s fair value at 30% (or more) above the current share price. [Total has been fairly range-bound since dropping from the late-April highs. Shares were hovering around $57 on Wednesday afternoon—Editor.]

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