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Dip in energy stocks could be buying opportunity

What are we looking for?

Stocks in the S&P/TSX 60 index that have the strongest earnings estimate momentum.

More about today's screen

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We'll turn to StarMine again today, which is a Thomson Reuters service that gathers earnings estimate data from analysts. One item that StarMine measures is earnings-revision momentum, which is how much earnings estimates have risen or fallen over time. We're looking at earnings estimate revisions over the past 30 and 60 days for the next quarter, next 12 months and two years out for companies in the S&P/TSX 60 index.

The thinking here is that investors will follow profits so the stocks with the strongest earnings-revision momentum should continue to do well. We'll sort by stocks with the strongest earnings revisions made over the past two months for the upcoming quarter.

What did we find out?

Yesterday, we found out that the energy sector is the strongest Canadian sector for earnings estimate momentum. Analysts have been increasing their profit estimates for oil companies in the past few months along with the spike in oil prices. They likely haven't caught up to the drop in oil this month, which has also dragged oil stocks down.

Not surprisingly, seven of the top 10 companies on the list today are energy companies.

Take a look at the last column, as it shows the "SmartEstimate" for the next 12 months. As we said yesterday, the SmartEstimate takes into account only analysts who have the most timely and accurate earnings estimate history. In other words, the SmartEstimate puts the most weight on the most accurate analysts. Many of the oil companies at the top of the list have big double-digit earnings growth expectations for the next year.

Suncor is one name near the top of the list that recently reported its first quarter and has fallen along with the sector. Yet there are reasons to think this is a buying opportunity if you believe the price of oil is going to head back up.

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RBC analyst Greg Pardy still likes the stock, saying in a research note last week that the quarter exceeded his expectations, net debt levels fell by one-third, largely in connection with proceeds from a joint venture, and the dividend was increased by 10 per cent. Even as Suncor trimmed its 2011 oil production guidance by 5 per cent because of issues in Libya, Mr. Pardy kept his target on the stock at $55.

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About the Author
Executive Editor, Report on Business

Scott Adams is the executive editor for Report On Business and Globe Investor. He was previously the managing editor of Globe Investor. He has been a business journalist for more than 10 years, worked as an associate analyst on Bay Street and has been with The Globe and Mail since 2007. More

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