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5 Top-Ranked Energy Bargains for Value Investors

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Oil prices are bouncing back after shaking off the Brexit bombshell that surprised investors late last week and sent the commodity to a seven-week low on strengthening dollar and fears of a global economic slowdown.

While Brexit will be a blow to U.S. oil explorers and producers like Apache Corp. (APA - Free Report) , which get around a fifth of their sales from the U.K., such cases are few and far between. In any case, the U.K. constitutes a miniscule 1.6% of global crude demand, so the commodity is unlikely to be too affected by a Brexit vote. Moreover, with core oil fundamentals still unchanged, the commodity is well set for a long-term recovery though one might have to wait for the dust to settle.

The Crude Resurgence

Crude prices, which reached $110 per barrel in mid-2014, fell to a 12-year low of $26.21 in Feb as investors worried about the oversupplied market. The commodity’s collapse threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and pummeling producer’s profit margins.

However, indications that supply was easing helped oil prices rebound some 90% since then.

The surge in benchmark crude is being driven by supply outages in Nigeria, Libya, Venezuela and Canada – countries that hold some of the world’s major sources of crude.

The upward pressure in oil prices also reflect the U.S. Energy Department's recent inventory releases that show crude stockpile builds turning into draws. Things have been further helped by a continued decline in U.S. crude production and drop in oil-directed rigs – indicating a break in shale drilling activities.

But Prices Remain Under $50

Despite oil’s massive recovery since February, it’s still under $50 – about half the level of two years ago – and far below the breakeven price for many energy companies. Therefore, the commodity is not yet out of the woods and record high inventories amid robust production could still push it to the depths of multiyear lows. As a result, the profit margins of several players from the industry have seen massive declines. This has hit stock prices as well.

Nevertheless, this has made many stocks not only cheap but also really good bargains. Although the overall bearish sentiment on the oil and gas industry took all stocks down with it, yet some of these remain fundamentally strong.

Look for Fundamentally Strong Cheap Stocks

While there can be many reasons to sell a stock, there is usually a single reason to buy. Who wouldn’t want to pocket a few extra bucks? Low-priced stocks never go out of fashion and one doesn’t really need to be a genius to understand why.

For starters, one can buy a lot many shares of a company for a certain amount. While expenditures seem to increase exponentially, the same is usually not true for our income. From the little that we actually manage to set aside for investment, one would definitely prefer to buy 100 shares, say at around $20, rather than buying 10 shares at $200. Often these $20 firms hold tremendous potential but remain off investors’ radar.

However, most of these players are generally not industry giants and hence, a little extra effort must be put in to select the correct stocks. This is where the Zacks Rank, which justifies a company’s strong fundamentals, can come in really handy.

Here Are the Stocks

With the help of our new style score system, we have picked five outstanding stocks that have excellent prospects and might offer solid investment returns. Our research shows that stocks with Value Style Scores of ‘A’ or ‘B’ when combined with Zacks Rank #1 (Strong Buy) or 2 (Buy) offer great investment opportunities.

Also, these stocks are currently trading below $20, which makes them lucrative picks.

Braskem SA (BAK - Free Report) : Together with its subsidiaries, Braskem SA produces and sells thermoplastic resins. Headquartered in Brazil, the company is the largest petrochemical operation in Latin America. Over the past quarter, the Zacks Consensus Estimate for 2016 experienced an increase of 25% to $2.32.

Zacks Rank #1

Value Score: A

Current Price: $11.73

North Atlantic Drilling Ltd. : Bermuda-based North Atlantic Drilling focuses on providing harsh environment offshore drilling services to the oil and gas industry, primarily in Norway and the UK. It has an excellent earnings surprise history, having beaten estimates in 3 of the last four quarters at an average rate of 80.90%.

Zacks Rank #1

Value Score: A

Current Price: $6.75

McDermott International Inc. (MDR - Free Report) : Incorporated in 1959, Houston, TX-based McDermott International is an engineering and construction company, solely focused on the offshore oil and gas business McDermott’s expected EPS growth rate for 3 to 5 years currently stands at 15.50%

Zacks Rank #1

Value Score: B

Current Price: $4.73

Transocean Ltd. (RIG - Free Report) : Switzerland-based Transocean is the world’s largest offshore drilling contractor and leading provider of drilling management services. It has an excellent earnings surprise history, having beaten estimates in each of the last four quarters at an average rate of 111.84%.

Zacks Rank #2

Value Score: A

Current Price: $11.04

Ocean Rig UDW LLC : Nicosia, Cyprus-headquartered Ocean Rig mainly provides services related to offshore drilling to the upstream energy players. The company’s drilling units specialize in operating in harsh-environment. Over the past 60 days, the Zacks Consensus Estimate for 2016 experienced an increase of 48.6% to $2.72 and per share.

Zacks Rank #2

Value Score: A

Current Price: $2.44

Bottom Line

Finding a bargain stock is all about strong fundamentals and making the most of an opportunity by taking the right decision at the right time. The best part of buying them: they come really cheap and hold tremendous potential.

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