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Trade: The Path to Picking 3 Energy Stocks

By SumOfSome | June 2, 2008

After some of the bi-weekly screens, I may select picks which stick out based on various indicators. This week, instead of explaining the justification for a single stock I like, I am walking through the process I use to narrow down a basket of stocks to select an individual. This week’s final selections are three stocks, Devon Energy Corporation (Ticker:DVN), Diamond Offshore (Ticker:DO), and Atwood Oceanics (Ticker:ATW) at their respective Friday close prices of $116.04, $136.74, and $101.91.

Screen Recommendation: I began these picks by looking at the stock selections of the three best screens and experts, which are the All Season Growth, The Street’s All Around, and The Street’s Fast Growth.  This is based on scores calculated by Sum of Some on a regular basis. Since these picks consistently and significantly outperform the market, I am starting on a good foot. I am starting my analysis with these 20 picks.

Sector and Industry Performance: I noticed that 8 of the 20 selections from these three screens are in the Energy sector, possibly indicating strength in this sector. Additionally, I am looking to invest more in this sector because of my views on the market as a whole – a discussion for another article. Looking at Clearstation’s Industry and Sector views shows Energy is ranked 3rd of the 12 sectors in the past 13-week period, confirming strength. Because of the strength and my desire to invest in this sector, I will narrow down to these 8 picks. Though Coal is leading the way in this sector, none of the picks are from the Coal industry. Oil Well Services & Equipment and Oil & Gas Operations are the next two strong performing industries in this sector, so I will examine these 5 options further. These 5 stocks are Atwood Oceanics (Ticker:ATW), Murphy Oil (Ticker:MUR), Diamond Offshore (Ticker:DO), Devon Energy (Ticker:DVN), and XTO Energy (Ticker:XTO).

Analyst Ratings: Looking at analyst ratings can sometimes throw quick red flags. Each of these companies have fairly good support from the analysts. I looked at a combination of analyst ratings from the Sum of Some Indicator List and was able to identify one stock from the list to remove, Murphy Oil, as it received generally lower ratings than the others, leaving 4 options.

Trending: Since you are better off buying stocks that trend upward, and buying during an uptrend, I next looked for candidates to eliminate due to trends. XTO has just entered a downtrend, as show on ClearStation and also has 2 sell trend signals from BarChart. Though XTO had slightly higher analyst ratings, and shows the lowest RSI of the group, indicating a trend toward being oversold, I will eliminate it from the group.

Company Comparison: The MSN Company Comparison helps compare companies (three at a time) side by side in regards to various performance indicators such as revenue and income growth, PE, expected stock price growth, etc. Using this tool with the three remaining companies shows very similar strengths, and no key means of distinguishing one as stronger than the other. No eliminations through this comparison.

News: Finally, I took a look at the recent news for each company. Looking at the news articles and commentary can help to identify issues that may impact the company or industry, can inform about poor management decisions or key management leaving, and give an overall sense of interest and faith in the company. Each of these three companies have positive messages coming from the news and comments. No eliminations by this option. Reading company releases and broker commentary on the industry or company can provide additional input to this area.

After looking at these key criteria, I feel comfortable with all three companies.  Keep in mind that each of these stocks is already pre-screened because they came from one of the experts/screens which Sum of Some tracks and scores.  This pre-screening lends a strong confidence to these picks to begin with.  Each investor may wish to consider other indicators as well, such as the amount of institutional ownership, recent insider trading, the market cap of the company, the volatility of the stock, etc. I will leave this up to preference and believe all three have strong potential.

Topics: ATW, DO, DVN, MUR, Ticker, Trade, Trade Opinion, XTO | No Comments »