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The 2 Best Energy Stocks in the Invesco S&P 500 GARP ETF
Matt DiLallo, Neha Chamaria, and Reuben Gregg Brewer, The Motley Fool
Exchange-traded funds (ETFs) can be great investment options. They enable you to invest passively in a sector of the market or specific theme. That can allow you to put your investments on autopilot.
ETFs can also be a great way for more active investors to find new stock ideas. For example, if you're looking for growth at a reasonable price (GARP), you should check out the Invesco S&P 500 GARP ETF(NYSEMKT: SPGP). One thing you'll notice is that the fund currently has a high concentration of energy stocks right now, accounting for more than 20% of its holdings. Here's a closer look at that fund and top holdings, ConocoPhillips(NYSE: COP) and Occidental Petroleum(NYSE: OXY), which stand out to some Fool.com contributors as the best ones to buy.
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Invesco S&P 500 GARP ETF is a select list
Reuben Gregg Brewer (Invesco S&P 500 GARP ETF): Some investors look for stocks that are growing quickly. Others look for stocks that look to be trading at a cheap price. And a third type of investor tries to find growing companies that have reasonable prices, essentially mixing the growth and value approaches. That's exactly what Invesco S&P 500 GARP ETF does.
On the growth side of the equation, this ETF looks at the top and bottom lines of the income statement with sales-per-share-growth and earnings-per-share-growth factors. On the valuation front it looks at the price-to-earnings ratio, but also the financial-leverage ratio and return-on-equity ratio, which are quality factors. Essentially, the goal isn't to just find cheap stocks, which is pretty easy to do, but to find high-quality stocks trading at reasonable prices. When you add in the growth factors, you get growth at a reasonable price, or GARP.
The good and bad news here is that GARP can be a pretty restrictive approach. Taking the 500 stocks in the S&P 500 (SNPINDEX: ^GSPC) as a starting point, Invesco S&P 500 GARP ETF ends up with only around 75 holdings. That said, you can use this ETF's elite list of holding to your advantage. Instead of doing all of that screening work yourself, just start out by cherry-picking from the holdings in Invesco S&P 500 GARP ETF.
A well-oiled machine
Matt DiLallo (ConocoPhillips): ConocoPhillips currently ranks as one of the 10largest holdings in the Invesco S&P 500 GARP ETF, with a roughly 1.8% weighting. It's growing its production at a solid rate for a company of its size. After adjusting for the impact of acquisitions and asset sales, the oil giant delivered 3% production growth during the third quarter. Meanwhile, its production growth rate was more than double that pace after adding in the boost it got from M&A.
The oil company's solid third-quarter showing didn't include any impact from its pending acquisition of Marathon Oil, which should close during the fourth quarter. The massive $22.5 billion acquisition will be immediately accretive to its earnings, cash flows, and return of capital per share. ConocoPhillips expects to capture more than $500 million in annual cost savings and other synergies after closing that needle-moving deal. On top of that, the company recently agreed to increase its stake in two oil fields in Alaska for $300 million.
Those acquisitions will grow ConocoPhillips' free cash flow. That helps drive its plans to return a lot more money to its shareholders in the future. The company increased its share repurchase authorization by up to $20 billion. That will enable the company to buy back even more of its reasonably priced stock. It has retired more than 11% of its outstanding shares over the past three years. It also boosted its dividend by 34% and plans to deliver dividend growth in the top 25% of companies in the S&P 500 in the future.
ConocoPhillips' growing cash flow and cash returns should help give the oil company the fuel to produce strong total returns in the coming years.
An intriguing value in the oil patch
Neha Chamaria(Occidental Petroleum): Occidental Petroleum is among the 15 energy stocks in the Invesco S&P 500 GARP ETF portfolio. With the oil and gas stock losing nearly a quarter of its value in the past six months, I believe it's a great time to consider buying it, given Occidental's recent acquisition and ongoing efforts to fortify its balance sheet.
Occidental, already one of the largest oil and gas producers in the U.S., acquired CrownRock in August for roughly $12 billion including debt to expand its footprint in the Permian and Midland basins. To put some numbers to that, the acquisition increased Occidental's Permian unconventional oil inventory at a breakeven of below $40 per barrel by nearly 33%.
Occidental expects the acquisition to add $1 billion in free cash flow within the first year at a West Texas Intermediate crude oil price of around $70 per barrel. Occidental's upcoming third-quarter earnings report on Nov. 12, therefore, should be an interesting one as it should also be the first to reflect incremental cash flows from the CrownRock acquisition. Meanwhile, Occidental has also started divesting assets after the acquisition, aiming to cut down its debt by at least $4.5 billion over the next year or so.
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Matt DiLallo has positions in ConocoPhillips. Neha Chamaria has no position in any of the stocks mentioned. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
