Tuesday, March 28, 2023
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I’m Only Buying ONE Energy Stock and This is It

Hey Bow Tie Nation, Joseph Hogue here and the ONLY stock I’m buying for our new Bow Tie Index, the official index we just launched last week, ticker BOWT, and your opportunity to track the best of the best stocks in the market.

BOWT Index

Now all you out there in the Nation know I’ve been a big buyer of energy stocks over the last two years. In our portfolio there on Stockcard, we booked returns as high as 163% on shares of Diamondback Energy and Devon.

I still own shares of Devon Energy and Chevron in my personal portfolio, great dividend cash machines, BUT we’re only adding ONE stock from the industry to the Bow Tie Index. Just one of the 23 largest energy companies in the market is going into our best of breed index for some very important reasons.

Last week I showed you the three internet stocks in the index, this week, I want to highlight that energy stock that made it on the list along with how you can track these best of the best stocks in the market.

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Nation, oil and gas stocks have been the standout winners this year, the only sector posting positive returns…up 47% year-to-date. Every single one of the top ten stocks in the S&P 500 index is from the group with returns as high as 133% for Warren Buffett’s favorite Occidental Petroleum.

That’s not the stock that made it into the Bow Tie Index though but it is in the top 10 performers if you want to guess which one.

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If you don’t want to guess, you can see all the stocks in the index through the link in the description below or go to Stockcard and to the Idea Center, click on Indexes and you’ll find the Bow Tie Index. From there you’ll see the methodology we’re using to pick stocks, the videos detailing it, some great ways to contribute your own ideas and the stocks in the index and their percentage.

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Don’t forget to follow the index to get early access to videos and be the first to see when I add a stock to the group.

Now before we get into that best of breed energy stock, I still do like the sector for returns this year. In fact, we could see a surge in oil prices in December or January that will take these stocks even higher. You see, the price of oil recently fell on an extension to how many barrels of oil are being taken out of the U.S. Strategic Petroleum Reserve. That’s an underground bunker holding hundreds of millions of barrels of oil that President Biden has been tapping over the last months to increase oil supply and bring down prices. He’s been releasing a million barrels a day since March and it has helped to keep oil below the $120 peak earlier this year and to bring down gas prices.

He’s extended the plan until December but it’s not something that can last. Reserves in the SPR are already their lowest since 1982, down more than 200 million barrels just this year.

I’ll be doing a full video on this in the coming weeks because it’s going to mean a massive increase in the price of oil as we deplete that reserve and come off the artificially high supply so make sure you join the community and tap that subscribe button so you don’t miss it.

Even if fears around a slowdown in oil demand because of the recession keep oil around $70 or $80 a barrel, these companies will still be cash flow machines. The research here by Morningstar is a little dated but shows the 2020 and 2021 break-even prices for the eight largest oil companies. After the crash in 2020, oil companies cut costs and lowered their production costs to as low as $50 a barrel and it’s closer to $40 a barrel for many of these now.

The price of oil could crash nearly 50% and these oil companies would still be cash flow positive. It’s how Devon Energy has been able to triple its dividend payment over the last year and why I still own the stock, even though I don’t think it’s the best of breed in the sector.

Devon is paying an 8.9% dividend yield, Chevron is paying 3.5% and even the entire sector, the SPDR Select Sector ETF, ticker XLE, is paying a 4.3% dividend yield…more than twice the overall market yield.

I’ll reveal that single energy stock that made it into the index next but first I want to show you the index, what it is and how it could outperform the broader market.

The Bow Tie Index is the top 10% of the large cap stock market, the best one-in-ten stocks among the 500 largest companies based in the United States. You can see in back-tested results over the last five years, investing in these best of breed stocks would have outperformed the SPY fund by more than 50% so there is definitely something here.

But I’m not just picking the top stocks across the market, we’re going through this is a way that will track the market very closely while still allowing the index to get that extra outperformance, basically an index fund that gives you the market return plus something extra.

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I’m starting with the percentage of each sector in that group of 500 largest companies in the market. Remember, the 11 sectors are groupings of companies that all serve a common need like Financial Services, Consumer Staples or Technology.

I’m going beyond just mimicking the market index. I’m constructing the Bow Tie Index in a totally unique way that gives you the benefits of that big picture sector investing but also the potential to find the best stocks in each.

For the Bow Tie Index, I’m using the same weightings for each sector in the market so if stocks in the financials sector are 11.5% of the market then it’s going to be 11.5% of the Bow Tie Index…but instead of all 58 stocks in the market, I’m only investing in the best of the best stocks, the 50 best stocks across the market so that same sector percentage of 11.5% is going to be the top five or six stocks in financials within the market.

In effect, we’re targeting the market return on each sector but then an additional return on picking the best stocks within each sector. It’s an innovative approach to investing that no other index is using and I’m excited about what it means for how you invest.

I walked you through the five quantitative factors we’re using to pick stocks last week; the analysis in sales growth, operating margins and valuation that narrows our list to the best performing stocks. I promised to detail the quantitative factors this week, how I’m using things like market position, strength of management and competitive advantages to find the best run companies.

But I’m not going to do that…you and I both want to get to that one energy stock that made the index so I’m going to get to it. Don’t miss next week’s video though and I’ll walk you through those factors you can use to pick the best stocks.

That best energy stock, ConocoPhillips, ticker COP with some great upside potential and cash flow.

We’ll dig into the analysis here but I know a lot of you are looking at that 1.6% dividend yield and thinking, Conoco…really? Why it over a mega-dividend like Devon or even the bigger players like Chevron?

But don’t be fooled by the lower headline dividend. That’s just what the company pays out for its regular quarterly payment. Like the other energy stocks, Conoco is a cash flow machine and it’s returning that cash to shareholders. The company upped its share buyback program to $2.5 billion this year, that’s about 1.7% of the outstanding shares. More importantly, Conoco has what it calls a Variable Return of Cash, here on the right. It’s a special dividend the company pays out in months staggered with the regular dividend…so investors are getting cash payments almost every month.

On the eight regular and variable dividend payments over the last year, Conoco has actually paid out $4.44 a share or a yield of almost four percent. That along with the valuation and the factors I’ll show you next make it one of the best, if not THE best energy stock to buy.

It’s in the quantitative factors I outlined last week that Conoco really sets itself apart from other energy companies. The company has been able to grow revenue by an 18% annual pace over the last three years, more than double the average growth in its industry. It’s also ramped that revenue growth up to 144% over the last year, again double the industry average.

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It’s also more efficiently run with an operating margin of 36% in the most recent quarter, above the industry average of 33% and that margin has improved from just 21% in 2019 so getting even more profitable.

On those qualitative factors I’ll explain more about in next week’s video, the company really pulls ahead of its competitors.

Conoco has the best production profile among major oil companies. More than half its planned oil production over the next decade will come from the Permian Basin fields in the south with some from the Bakken and Eagle Ford regions but much less internationally than other majors like Exxon.

This is important for two reasons. First, it helps protect the company from geopolitical problems drilling in other countries or a loss of fields like Exxon had to take when it exited Russia production earlier this year.

It also means Conoco will benefit from some of the lowest cost oil production in the United States. This analysis by Raymond James shows the oil price needed to break even on production in various fields. You can see Eagle Ford production around $40 and $45 a barrel with Bakken fields as high as $55 a barrel. Permian fields though, those are in the Midland and Delaware resource plays on the left with production costs as low as $35 a barrel.

And while I worry that some oil companies might be increasing production at exactly the wrong time, management at Conoco is committing to a capital spending plan that’s light on production and heavy on shareholder cash return.

Like most energy stocks that have seen the share price boom this year, there isn’t a lot of upsides to the average analyst target. Analysts have the stock at $130 over the next year, only about 8% from where it is now but I think the company surprises everyone with stronger cash flow and price return.

Check Out the Entire Just One Stock Series

If You Invest in ONE Bond ETF, Make it This One
If You Invest in ONE Growth Stock, Make it This One
If You Invest in ONE Value Stock, Make it This One
If You Invest in ONE Index Fund, Make it This One
If You Invest in ONE Dividend REIT Stock, Make it This One

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