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At any given time, some market sectors look better than others. Our proprietary Quadrix ranking system can help you spot the industries with the strongest fundamentals, asserts Rich Moroney, editor of Dow Theory Forecasts.

Within the S&P 1500, the average energy stock earns an Overall score of 75, by far the best among the 11 sectors. Energy stocks average strong scores for the Momentum, Value, and Performance categories.

EOG Resources (EOG) grew sales by 70% and per-share profits by 167% over the last year, and the stock has returned 37% so far in 2022. Yet as impressive as these numbers sound, they don’t stand out from the crowd in the oil & gas exploration industry.

On average, independent energy producers earn Overall scores of 87 in our Quadrix ranking system, good for fourth-best among the 157 industry groups.

That high score stems from a variety of positive factors — robust operating momentum (average sales growth of roughly 150% and profit growth of roughly 350% over the last 12 months), compelling values (average trailing price/earnings ratios of nine), and encouraging price action (average total returns of 55% this year).

Pretty much any stock screen driven by fundamentals these days unearths a few energy companies. So, why do we prefer EOG? Here are three ways the company distinguishes itself from the pack:

1) Production focus. EOG targets what it calls double premium wells, or those capable of generating an after-tax return of 60%. The combination of controlled drilling expansion and rich returns leads to both reliable and profitable production growth.

2) Disciplined management. In November, the company said it would limit production expansion until the “market clearly needs the barrels.” Growth resumed in the June quarter, but EOG targets just 4% higher production this year and next year. The company could easily ramp up growth, but EOG’s approach should limit risk and support margins.

3) Rich dividend policy. EOG has pledged to return at least 60% of free cash flow to investors. The regular quarterly payout of $0.75 per share equates to a yield of 2.5% on its own. However, EOG has a history of boosting that yield via special dividends. So far this year, EOG has declared three for a total of $4.30 per share. EOG is a long-term buy.
 

About the Author

Richard Moroney, CFA, is the editor of Dow Theory Forecasts and the Upside newsletter; the vice president of research for Horizon Publishing Company; and vice president and portfolio manager of Horizon Investment Services, a money management company. He is the inventor of the proprietary Quadrix® stock-rating system. Called "An Intellectual Heir to Charles Dow" by his peers and the press, Mr. Moroney is sought out for his accurate forecasts on the market and specific stocks by major news organizations and business groups. He has appeared on CNN, CNBC, and Sky Radio and is often quoted in Barron's, Investor's Business Daily, SmartMoney, Business Week, The Washington Post, The Chicago Tribune, and the Chicago Sun Times. Mr. Moroney holds an MBA in finance from the University of Chicago.

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