One energy stock to buy, two to consider

energy-stock-picks-for-todays-marketWith $357 billion worth of small investor money sitting in cash, Wednesday's Dow poke-through to 10,000 ought to bring a large shift of cash into stocks. The question is where investors ought to put it. While it may make sense to just buy stock index funds, there are going to be people who prefer to buy individual stocks. As I posted, Goldman Sachs Group (GS) thinks that energy stocks will report faster-than-average revenue growth. So read on for three such stocks to consider.

Before describing my rationale for these picks, it's worth describing a handy measure I use to assess whether a stock is expensive. Unfortunately, it depends on earnings forecasts, and since I don't do these forecasts myself, I don't know how reliable they are. The measure is the Price/Earnings to Growth (PEG) ratio which divides a stock's P/E by its earnings growth rate. If the PEG is less than 1.0, I consider the stock relatively inexpensive.

The three energy stocks I see as worth evaluating are Chevron (CVX), ConocoPhillips (COP) and Exxon Mobil (XOM). Of these three, I think ConocoPhillips is the best bargain. Here's my assessment of each.

  • ConocoPhillips – PEG 0.12. This is the best buy of the three -- its forward P/E is 8.4 and its earnings are forecast to grow 69.5 percent to $6.01 in 2010.
  • Chevron – PEG 0.14. This is the second-best deal -- it trades at a P/E of 9.3 and its earnings are forecast to grow 64.5 percent to $7.32 in 2010.
  • Exxon Mobil – PEG 0.23. Not quite as good as the other two, but it's trading at a P/E of 11.6, and its earnings are expected to grow 51 percent to $6.11 in 2010.

I can't emphasize enough that these valuations are based on forecasts which may prove inaccurate -- but those analysts are rewarded for accuracy, so they at least have an incentive to try. Happy investing!

Peter Cohan is a management consultant, Babson professor and author of nine books, includingCapital Rising (due in June 2010). Follow him on Twitter. He has no financial interest in the securities mentioned.

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