Stock of the Week: This Energy Producer Is Flush With Cash… and Dividends

|September 16, 2022

Good news… I’ve got another energy stock for you this week.

Now, before you say, “Again?”…

Hear me out.

I like this company because it’s earning so much money. It pulled in $1.6 billion in net income in the second quarter. That’s in just three months!

Thanks to that income, the company has declared a special dividend.

Cash flow from operations in the second quarter came in at $2.4 billion.

And here’s where I really get excited…

The dollar is at an all-time high against many currencies. So if this cash-rich company wanted to explore abroad and pay cheap overseas charges and costs – or maybe look for takeover targets – now would be the time to do it.

Take a look at the stock and see how it fares by my strict metrics in my latest video.

Click on the image below to watch it.

Transcript

Good news… I’ve got yet another resources company for you in today’s Stock of the Week.

Now, you’re probably thinking, “Alpesh, this is just too obvious and easy. What else could it be?”

Well, let me tell you about this company so you can get a bit of insight into how hedge funds and my team think – and the kinds of things we look at.

Today’s stock is EOG Resources (EOG). It engages in the exploration for and development, production and marketing of crude oil and natural resources. It’s headquartered in Texas and trades on the New York Stock Exchange.

I like this company because it’s earning so much money. It pulled in $1.6 billion in net income in the second quarter. That’s in just three months.

Thanks to that income, the company has declared a special dividend.

Also in the second quarter, cash flow from operations came in at $2.4 billion. Don’t forget… the dollar is at an all-time high against many currencies. So if this company wanted to explore abroad and pay cheap overseas charges and costs – or maybe look for takeover targets – now would be the time to do it.

Let’s look at some of the financials.

EOG has a Growth-Value-Income rating of 7. Remember, this is my proprietary algorithm that looks at a company’s revenue growth, valuation, profitability relative to share price, cash flow, momentum… a whole bunch of factors. And my GVI rating has held me in good stead when it comes to finding stocks.

The company’s CROCI – cash return on capital invested – is at 14.6%. That puts EOG in the top quartile of all companies by CROCI. In other words, the top 25% of all companies.

That’s important because CROCI is a ratio developed by Deutsche Bank and used by Goldman Sachs Wealth Management for its wealthiest clients. What they discovered is if you buy a basket of stocks in the top quartile by CROCI and hold them for 12 months – and you keep doing that with the top quartile of stocks every 12 months – over a period of time, you get a 30% per annum return.

That return is not guaranteed in every stock and not guaranteed every single year, but as a basket, that’s what ends up happening.

That’s what they discovered. No wonder they tell their wealthiest clients… and no wonder the rich clients of Goldman Sachs keep on getting richer.

So EOG’s 14.6% CROCI definitely puts the stock in the top quartile.

Now, I’m a bit more stringent than Goldman is. I don’t look at just CROCI. I look at a whole bunch of other factors.

Sortino ratio is a measure of returns over volatility. And the higher the number, the better (preferably over 1.0). EOG has a ratio of 0.34, which is fine by me.

Volatility is a little bit high at 26%. I’d prefer to see it under 20%. I don’t like too much volatility.

Return alpha is a measure of whether the stock is outperforming the market. I’m happy with EOG’s 6%.

Turnover’s gradually been increasing. Operating cash flow is strong as well. Total assets are great. We have a good balance sheet as well.

Obviously, EOG is incredibly profitable. But remember, we’re looking to hold these stocks for 12 months. We’re not looking to hold them forever. The energy crisis will, at some point, abate. We’ll just run out of natural resources at some point.

Return on capital is at 22.5%. That’s good. Return on equity is at 27%. Again, good, solid numbers.

What about forecast growth?

Well, turnover is forecast to grow at 40.8%. (The three-year average has been only 4.6%.)

Despite that strong growth forecast, we have a valuation (the current share price relative to the forecasted profitability) at just 7.5. It normally is a lot higher, which means EOG is undervalued.

If those forecast growth figures do come true, even a little bit true, the valuation is relatively low. That’s what tends to drive the share price higher. Basically, you exceed expectations.

So at the moment, we have strong forecasted growth, but the expectations are relatively low because the share price is relatively low compared with forecasted earnings. We know the expectations are low, despite forecasted growth being high.

That inconsistency is the arbitrage. That’s how you say, “Right, wait a minute. You’re saying that, and you’re saying this… Both things can’t be true.”

Therefore, we expect the price to rise.

Looking at the stock chart, EOG has had a nice upward trend since about September 2020. Yes, it moves off the trend now and again. But then it gets a gust of wind under it and goes even higher… and then comes back down… and then goes back up. It’s kept to this upward trend and sometimes outperforms it, but the stock always seems to land back on the trend. That’s what gives us some nice assurance that this is a solid Stock of the Week.

You can see all the charts and data I’ve gone through for EOG Resources by watching my latest video.