With the forces of geopolitics and social normalization trends converging, investors may want to consider energy stocks sitting in the sweet spot. What exactly does that entail, though? For one thing, the underlying sector – especially the hydrocarbon arena – will command long-term relevance. While the ideological winds seek to replace fossil fuels, renewable sources often lack the energy density required to compete effectively.
The other component that makes the below energy stocks exceptionally compelling is that they hit the sweet spot of being undervalued (by objective standards) but highly rated among Wall Street analysts. Further, it’s not just about the baseline assessment itself. Rather, each of the names below commands an average price target that implies double-digit reward potential.
PBF Energy (PBF)
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A petroleum refiner and supplier of unbranded transportation fuels, heating oils, and lubricants (among many other products), PBF Energy (NYSE:PBF) deserves special consideration as we recover from the Covid-19 pandemic. With social normalization trends likely to increase traffic volume on our roadways, PBF offers an opportunity to profit. Indeed, since the January opener, PBG gained over 12% of its equity value.
Financially, the company isn’t perfect but it holds its own. For instance, its Altman Z-Score comes in at 5.08, indicating low bankruptcy risk. Also, PBF’s debt-to-EBITDA ratio comes in at 0.61 times, favorably below the industry median of 1.67 times.
Operationally, the refiner posts a three-year revenue growth rate of 22.4%, ranked better than 79.48% of the oil and gas sector. Most importantly regarding this topic of energy stocks in the sweet spot, the market prices PBF at a forward multiple of 4.94. As a discount to earnings, the company ranks better than 71.07% of the competition. Finally, Wall Street analysts peg PBG as a consensus moderate buy. Their average price target stands at $51.44, implying over 22% upside potential.
Marathon Petroleum (MPC)
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A petroleum refining, marketing, and transportation firm, Marathon Petroleum (NYSE:MPC) is one of the larger players in its field. At the moment, the company carries a market capitalization of nearly $56 billion. Since the Jan. opener, MPC returned shareholders almost 14%. In the past 365 days, it moved up 58%. Still, it technically ranks as one of the underrated energy stocks sitting in the sweet spot.
Currently, the market prices MPC at a trailing multiple of 4.42. As a discount to earnings, Marathon Petroleum ranks better than 68.76% of sector rivals. In addition, MPC trades at 0.36 times sales. However, the sector median value, in this case, is 0.93 times.
Notably, Marathon carries an Altman Z-Score of just under 4, indicating an enterprise safe from bankruptcy. As well, its debt-to-EBITDA pings at 1.12 times, below the sector median of 1.67 times. Moreover, Marathon’s a growth machine, posting a three-year revenue growth rate of 27.1%. Lastly, covering analysts peg MPC as a consensus strong buy. Their average price target stands at $147.92, implying over 17% upside potential.
Valero Energy (VLO)
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A downstream energy specialist, Valero Energy (NYSE:VLO) mostly focuses on manufacturing and marketing transportation fuels. As well, it covers other petrochemical products and power. Because of the ongoing social normalization trends, VLO easily represents one of the more relevant energy stocks. Since the beginning of this year, shares gained over 7% of equity value. In the past 365 days, they’re up nearly 37%.
Even with the tremendous upside, VLO technically remains underrated. For instance, the market prices VLO at a trailing multiple of 4.43. As a discount to earnings, Valero ranks better than 68.61% of its peers. Also, VLO trades at a sales multiple of 0.28. As a discount to revenue, the company beats out 80.23% of the industry.
Further, Valero enjoys a robust balance sheet, backed by an Altman Z-Score of 5.55. Moreover, its three-year revenue growth rate pings at 19.4%, outpacing 76% of competitors. In closing, analysts peg VLO as a consensus strong buy (with one sell rating). Overall, the average price target comes out to $161.67, implying over 25% upside potential.
Magnolia Oil & Gas (MGY)
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Based in Houston, Texas, Magnolia Oil & Gas (NYSE:MGY) is one of the underrated energy stocks for good reason. Since the beginning of this year, MGY fell over 7%. In the past 365 days, it gave up nearly 15% of its equity value. Still, the exploration and production (upstream) company could be an intriguing idea to consider, especially if you like to gamble.
First, Magnolia enjoys a strong balance sheet. Its cash-to-debt ratio comes in at 1.73 times, outbidding 65.5% of the competition. Also, its equity-to-asset ratio is 0.61, which ranks better than nearly 66% of the oil and gas industry. Moreover, the company’s three-year revenue growth rate pings at 16.9%, while its net margin is nearly 53%. Both stats rank well into the industry’s upper half.
Regarding valuation, the market prices MGY at a trailing multiple of 4.36. As a discount to earnings, Magnolia ranks better than nearly 70% of its peers. Also, its price-to-free-cash-flow (FCF) is 4.64 times, below the industry median of 7.3 times. Turning to Wall Street, analysts peg MGY as a consensus strong buy. Their average price target comes out to $29.67, implying nearly 45% upside potential.
Devon Energy (DVN)
Focused on hydrocarbon exploration, Devon Energy (NYSE:DVN) commands a relevant profile among energy stocks. Unfortunately, DVN failed to resonate with investors so far this year. Since the Jan. opener, DVN gave up a worrying 19% of equity value. In the past 365 days, it’s off the mark by 23.5%. Nevertheless, for those that want to live a bit dangerously, DVN offers something to think about.
Despite its market losses, Devon enjoys a decently stable balance sheet. Notably, its debt-to-EBITDA ratio of 0.65 times ranks better than 73.15% of its peers. Also, its Altman Z-Score pings at 3.69, indicating low bankruptcy risk. Operationally, the company features a three-year revenue growth rate of 23.7% and a net margin of 31.38%. Both stats rank well in the upper half of the hydrocarbon sector.
Most importantly for our discussion of energy stocks in the sweet spot, the market prices DVN at a forward multiple of 5.75. As a discount to earnings, Devon ranks better than 60.69% of its rivals. Looking to the Street, analysts peg DVN as a consensus moderate buy. Their average price target currently stands at $68.75, implying over 46% upside potential.
Arch Resources (ARCH)
A coal mining and processing firm, Arch Resources (NYSE:ARCH) mines, processes, and markets bituminous and sub-bituminous coal with low sulfur content in the U.S. Per its public profile, Arch is the second-largest supplier of coal in the nation. Despite its relevancies, since the beginning of this year, ARCH slipped over 2%. In the trailing year, it’s down 13%.
Nevertheless, for contrarian investors, ARCH may be one of the energy stocks sitting in the sweet spot. Presently, the market prices ARCH at a trailing multiple of 2.04. As a discount to earnings, the company ranks better than 83.67% of sector players. Also, its price-to-FCF comes in at 2.65 times. Here, the applicable discount for Arch ranks better than 69.47% of the industry.
Beyond the valuation, Arch benefits from a solid balance sheet, backed by an Altman Z-Score of 5.43. Also, the coal firm’s three-year EBITDA growth rate stands at 41%, above 74.15% of the competition. Finally, Wall Street analysts peg ARCH as a unanimous strong buy. Their average price target pings at $201.33, implying nearly 54% upside potential.
Evolution Petroleum (EPM)
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Headquartered in Houston, Texas, Evolution Petroleum (NYSEAMERICAN:EPM) is an independent energy company focused on maximizing total returns to its shareholders through the ownership of and investment in onshore oil and natural gas properties in the U.S. As with some of the riskier energy stocks, EPM looks shaky at the moment. Since the January opener, shares tumbled nearly 20%.
Still, for the contrarian investor, EPM could also rank among the underappreciated energy stocks to buy. Financially, Evolution benefits from excellent strengths in the balance sheet. In particular, the company features a cash-to-debt ratio of 17.84 times, above 77.23% of the industry. Also, its Altman Z-Score of 5.51 indicates a low risk of bankruptcy.
Regarding the theme at hand, the market prices EPM at a trailing multiple of 4.51. As a discount to earnings, Evolution ranks better than 68.46% of its rivals. Also, it trades at 2.82 times the operating cash flow. In contrast, the sector median value is 4.41. Lastly, Northland Securities’ Donovan Schafer, CFA, pegs EPM as a buy. Further, the expert anticipates shares hitting $11, implying nearly 97% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.