The buzz across energy trading desks Tuesday was the call by Goldman Sachs analysts for higher oil prices this year. Wasn’t it just a few weeks ago that the premier commodity trading house said oil was over-priced and due for a pullback? This is not the first time, and it won’t be the last, that they correctly pick (or make) a short-term top and create a new buying opportunity.
What’s really important for investors is that we still have time to buy some of my favorite names in the sector before Goldman’s "buy the dips" theme in energy equities makes them run away from us. My top pick is the Canadian oil sands play Suncor (SU). This stock has made a slow and steady pullback after the two-and-half year highs hit in early March just above $48.50.
And since Suncor is a Zacks #1 Rank (Strong Buy) stock, picking up some shares anywhere near $40 is an excellent play looking for the name to revisit those highs, especially as crude oil climbs back above $100 toward its yearly highs.
What’s going to drive Suncor share prices? The same thing that gives it a #1 Rank — earnings growth and rising estimates. With current year EPS of $2.82, the analyst community is expecting growth of 23% and next year’s consensus estimate is $3.23. Plus, it certainly doesn’t hurt when an energy company continues to offer EPS surprises as Suncor did last quarter with a 73% positive "how you doin?"
This is not the first time that Suncor has surprised so big, posting a similar leap in the second quarter of 2010. But apparently analysts weren’t impressed then and earnings estimates were basically flat-lined for the next three quarters as you can see in the Price and Consensus chart below. That’s why the stock retained a Zacks #3 Rank (Hold) for most of the past year. This time, though, analysts are paying attention to Suncor’s earnings potential with enough upward revisions for this year and next to launch it up to a #1 Rank.
If you are not a buyer of Suncor at this time, at least keep your eye on it — and the Zacks Rank for the stock — as we head into the summer driving season and its next quarterly report July 28. But with an earnings picture this bright, just don’t stare directly at it.
Kevin Cook is a Senior Stock Strategist for Zacks.com
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