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Warren Buffett is the world’s most famous investor, worth some $73 billion at last count. His homespun ways and buy-and-hold investment philosophy have arguably made him America’s favorite billionaire.
But achievements such as Buffett’s place on the Forbes 400 list don’t come about solely through the efforts of a single individual. He is just one of many men who had a particular teacher who showed them the ropes and taught them how to think about investing in stocks. That teacher was none other than the father of value investing, Benjamin Graham. And while Graham passed away in 1976 at the age of 82, his legacy lives on in the careers of dozens of extraordinarily successful investors.
While the strategies behind Graham’s methodology of buying stocks for less than their “intrinsic value” have changed over the years, we can at least guess at what the master might be interested in today thanks to his writings and nearly a century of value-investing history. What’s more, given his history of investing in “unloved” businesses, there may be no better industry to apply his methodologies to today than the energy sector. As we shall soon see, Marathon Oil, Crescent Point Energy, and Transocean are all extremely attractive when looked at from Graham’s perspective.
So, without further ado, here are three energy stocks that Benjamin Graham might find appealing in today’s marketplace.
Following the 2011 spin-off of its refining and marketing operations into Marathon Petroleum, Marathon Oil became a pure-play oil and natural gas producer. While that business model worked for a while, the 2014 downturn in the energy industry has taken its toll on the company.
Now, with green shoots appearing in the oil sector, Marathon Oil is the kind of stock that Graham would have likely been attracted to. The company trades not only at a discount to its Dec. 31, 2016, tangible book value of $20.50 per share, but at a reasonably low ratio to its historic EPS.
As Graham noted in his book The Intelligent Investor, he wasn’t concerned with any particular year’s earnings showing. What mattered to him was a longer-term record showing decent, averaged-out earnings power. In his view, any reasonably large enterprise would stumble every so often; what mattered was its average performance over many years.
Marathon showed a net loss of $2.62 per share in fiscal 2016, a whopping $2.2 billion total loss. This single data point might scare the layman, but not Graham. He would look to Marathon’s performance over the past decade, when it averaged an EPS of $2.39. With shares trading at around $16, it seems fair to say that Marathon Oil would have at least caught Graham’s attention.
Crescent Point Energy
Having been born in London, England, in 1894, it’s possible that Graham would have had an affinity for the British Empire’s outpost to our north: Canada. Especially when a Canadian company was trading for less than it was arguably worth. Calgary-based Crescent Point Energy is likely such a stock.
With operations that span Canada and south into U.S. states such as North Dakota, Crescent Point is the quintessential North American oil producer. Unsurprisingly, its shares have languished over the past two-plus years alongside the price of crude oil. Today, those shares may be trading for too low a price — and this would have attracted Graham.
In the latter years of his life, Graham was increasingly open to paying attention to qualitative factors when it came to stock investments. Despite the absolute carnage that has ravaged the energy industry, Crescent Point Energy has managed to be free cash flow (FCF) positive in both of the last two years. (In fiscal 2016, FCF came to 128 million Canadian dollars, in 2015, it was CA$328 million.) That’s no small feat.
With the stock trading just below its tangible book value, and a record of fantastic execution on the part of management, it would not have been surprising to find a few shares of Crescent Point in Graham’s portfolio today.
While it seems probable that the offshore rig subsector will continue to lag behind the energy sector, even if the latter experiences a modest rebound in drilling activity in the near future, Graham likely would have found Transocean’s discount to its tangible book value too good to pass up.
In his early days, Graham pioneered not only the idea of investing in stocks as one would a private business, but that of buying stocks for less than the underlying assets of said business could be liquidated for. These were often very troubled businesses indeed, but this didn’t scare Graham. To him, buying a basket of stocks for less than their assets would likely be worth in liquidation was a good recipe for producing market-beating results.
At the time of this writing, Transocean shares are trading hands at $12.50 per share, some 62% below its tangible book value per share of $40. True, most of that value is locked up in offshore oil drilling rigs (not the best asset to own during a secular oil price downturn), but this unfortunate fact is mitigated by management’s recent moves to lower the average age of its fleet. Once the dinosaur of the industry — that is, the player with the oldest rigs that commanded the lowest day rates — the company has invested heavily in becoming more youthful. The average age of its fleet, at last count, stood at 14.3 years, which makes it slightly more competitive with even the likes of industry heavyweight Noble PLC (average fleet age: 14.5 years).
Given the wide discrepancy between Mr. Market’s assessment of Transocean’s value and the asset values backing its shares, Graham would have likely been more than interested in a position in the stock.