A Ranking system sorts stocks from best to worst based on a set of weighted factors. Portfolio123.com has a powerful ranking system which allows the user to create complex formulas according to many different criteria. They also have highly useful several groups of pre-built ranking systems; I used one of them, the "All-Stars: Buffett," in this article. The ranking system is based on investing principles of the well-known investor Warren Buffett.

The "All-Stars: Buffett" ranking system is quite complex, and it is taking into account many factors like; book value growth, operational P/E, price to book value, trailing P/E, price to Tangible book value, price to cash flow and EPS Stability, as shown in Portfolio123's chart below.

In order to find out how such a ranking formula would have performed during the last 17 years, I ran a back-test, which is available in the screener. For the back-test, I took all the 6,389 stocks in the Portfolio123 database.

The back-test results are shown in the chart below. For the back-test, I divided the 6,389 companies into twenty groups according to their ranking. The chart clearly shows that the average annual return has a very significant positive correlation to the "All-Stars: Buffett" rank. The highest-ranked group with the ranking score of 95-100, which is shown in the light blue column in the chart, has given the best return - an average annual return of about 12.3%, while the average annual return of the Russell 1000 index during the same period was about 3.4% (the red column at the left part of the chart). Also, the second and the third group (scored: 90-95 and 85-90) have yielded superior returns. This brings me to the conclusion that the ranking system is very useful.

After running the "All-Stars: Buffett" ranking system for all Russell 1000 energy companies, on July 20, I discovered the twenty best stocks, which are shown in the table below. In this article, I will focus on the first ranked stock HollyFrontier (HFC).

HollyFrontier's stock has fallen sharply in the last few months due to continued weak refining industry fundamentals. High inventories of gasoline and diesel have weighed on refining margins. However, in my opinion, the recent drop in its price creates an excellent opportunity to buy HFC's stock at an attractive price. The company has a compelling valuation, and its stock is trading below book value. Furthermore, HollyFrontier is paying a generous dividend currently yielding 5.4%.

Year-to-date, HFC's stock is down 38.9% while the S&P 500 Index has increased 5.9% and the NASDAQ Composite Index has gained 0.6%. Moreover, since the beginning of 2012, HFC has gained only 36.1%. In this period, the S&P 500 Index has increased 72.1%, and the NASDAQ Composite Index has risen 93.3%. According to TipRanks, the average target price of the top analysts is at $32, an upside of 31.4% from its July 19 close price, which appears reasonable, in my opinion.

HFC Daily Chart

HFC Weekly Chart

Charts: TradeStation Group, Inc.

Refining Margin

According to a Howard Weil report from July 13, U.S. Gulf Coast's average crack spread thus far in the current quarter has been $9.04 per barrel, compared to $11.21 in the second quarter of 2016. As such, we can expect some decline in the refining margin for the company in the current quarter along lower earnings.

Source: howardweil.com

Valuation

Considering its compelling valuation and high growth prospects, HFC's stock, in my opinion, is considerably undervalued. The stock is trading below book value, price to book is at 0.85, and the price to cash flow is very low at 4.50. The trailing P/E is very low at 8.70, and the forward P/E is also very low at 9.84. The price-to-sales ratio is extremely low at 0.37, and the Enterprise Value/EBITDA ratio is also exceptionally low at 4.24. Furthermore, the PEG ratio is very low at 0.82. The PEG ratio - price/earnings-to-growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means the stock is more undervalued.

Dividend

The regular quarterly dividend is at $0.33 per share, and the yield is very high at 5.42% The payout ratio is at 47.1%. The annual rate of dividend growth over the past five years was very high at 34.3%, and over the last ten years was also very high at 30%. The current yield is historically high, which indicates that the stock is undervalued, according to some dividend assessment theories.

Summary

Despite unfavorable refining fundamentals due to high inventories of gasoline and diesel, HFC's stock is very attractive at the current price. Considering its compelling valuation and high growth prospects, HFC's stock, in my opinion, is considerably undervalued. The stock is trading below book value, price to book is at 0.85, and the price to cash flow is very low at 4.50. The Enterprise Value/EBITDA ratio is exceptionally low at 4.24, and the PEG ratio is also very low at 0.82. Furthermore, HollyFrontier is paying a generous dividend currently yielding 5.4%. Furthermore, according to Portfolio123’s "All-Stars: Buffett" ranking system HFC's stock is ranked first among all 55 Russell 1000 energy stocks. The average target price of the top analysts is at $32, an upside of 31.4% from its July 19 close price, which appears reasonable, in my opinion.