In the hunt for investment chances, many investors use a disciplined, basic method called value investing. This plan, made famous by people like Benjamin Graham and Warren Buffett, centers on finding companies whose share price seems to be lower than their actual worth. The aim is to locate good businesses that the market has incorrectly priced for now, giving a possible "margin of safety" for the investor. One useful method to use this idea is by applying systematic filters that search for particular basic strengths, like an attractive price along with acceptable financial condition, earnings, and expansion. A stock that recently appeared from such a "Decent Value" filter is Devon Energy Corp (NYSE:DVN), an independent energy company with a major presence in U.S. shale basins.
A Look at Price
The main part of any value investment case is an appealing price. For a value investor, a low cost compared to basic measures is the first sign that a stock might be priced too low. Devon Energy's basic report shows a good price rating of 7 out of 10, which is the main reason it passed the first filter.
- Price-to-Earnings (P/E) Ratio: At 11.35, Devon's P/E ratio is seen as fair and is much lower than the S&P 500 average of about 27. More notably, it is lower than over 81% of similar companies in the Oil, Gas & Consumable Fuels industry.
- Enterprise Value to EBITDA: This measure, which includes debt, also points to a low price, with Devon being less expensive than almost 84% of its industry rivals.
- Price-to-Free Cash Flow: The company's price based on the cash it produces is positive, rated lower than 83.5% of the industry.
These numbers imply the market is valuing DVN cautiously, possibly giving the discount that value investors look for. You can see the full details in Devon Energy's fundamental analysis report.
Checking Financial Condition and Earnings
A low-priced stock is only a bargain if the company is basically healthy. A low cost can sometimes be a "value trap" if the business is facing debt or weak operations. So, value plans usually need reviews of financial condition and earnings to confirm the company is stable and able to produce returns. Devon gets a 5 for Condition and a 6 for Earnings, showing an average to somewhat better-than-average standing.
Financial Condition (Score: 5) The company's solvency measures are mostly positive. Its Debt-to-Equity ratio of 0.48 shows it does not depend too much on debt, and its Debt-to-Free-Cash-Flow ratio of 3.01 is viewed as acceptable, meaning it could clear its debt with just over three years of cash flow. These numbers beat a big part of its industry. One area to note, though, is cash availability: both the Current and Quick Ratios are under 1.0, hinting at possible issues in covering immediate bills without new cash flow, a typical feature in the capital-heavy energy field.
Earnings (Score: 6) Devon shows acceptable earnings from its activities. Important return measures are positives:
- Return on Invested Capital (ROIC) of 10.97% is better than 87% of the industry.
- Return on Equity (ROE) of 17.01% and Return on Assets (ROA) of 8.36% also place in the top group among peers.
While its Profit and Operating Margins have fallen from recent peaks, a pattern seen in the energy field as commodity prices adjusted, they stay in line with the industry. This steady ability to make profit from its capital is a key point for maintaining activities and benefiting shareholders over time.
Looking at Expansion Path
While strict value investing occasionally centers on flat companies, adding an expansion filter aids in spotting businesses that might be priced low and have a way to raise their actual worth. Devon's Expansion rating is a 4, showing a varied situation that is important for understanding.
The last year showed a drop in Earnings Per Share (EPS), though Revenue increased by almost 8%. More notably, the company's Revenue has increased at an average yearly rate of almost 29% over the past few years. Looking ahead, analyst forecasts predict EPS expansion to restart at over 11% per year, though Revenue is predicted to have a small decrease. For a value investor, this expansion picture, particularly the anticipated return in earnings, implies the business is not in a permanent fall but may be in a cyclical low point, which can often show a chance to buy.
Final Thoughts: A Pick for the Value-Focused Portfolio
Devon Energy Corp presents a case that fits with several ideas of value investing. It trades at a price that is clearly low compared to both the wider market and its own industry, giving that first margin of safety. Its financial condition, while having a cash availability limit, is backed by acceptable debt amounts and good cash flow production. Most significantly, its earnings measures are solid, showing it is a capable operator within its sector. The expansion view, while not outstanding, suggests the company is set to increase earnings from its current level.
For investors using a plan that looks for low-priced stocks with healthy basic measures, DVN deserves more study. It represents the kind of chance filters are made to find: a possibly missed company with acceptable core business numbers available at a reduced cost.
Find Other Possible Value Chances The "Decent Value" filter that found Devon Energy is made to search the market for similar chances. If you want to look at other stocks that fit these needs of good price, acceptable earnings, condition, and expansion, you can see the current filter results here.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. Investing has risk, including the possible loss of initial investment. Readers should do their own study and talk with a qualified financial advisor before making any investment choices.
