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The energy sector has underperformed this year. Lower commodity prices and rising interest rates have weighed on the sector. That’s left many energy stocks looking compelling.

Precision Drilling (NYSE: PDS), Brookfield Infrastructure (NYSE: BIP)(NYSE: BIPC), and Enphase (NASDAQ: ENPH) stand out to a few contributors as top stocks to buy, given how cheap they are these days. Here’s why investors don’t need to think twice about adding them to their portfolios.

Selling for pennies on the dollar

Tyler Crowe (Precision Drilling): After years of sweating every inefficiency out their businesses, paying down debt, or restructuring, a lot of oil and gas equipment companies now have stellar balance sheets and lean operations that look like compelling investments today. The industry is also in much better shape than several years ago. Most of the older, less profitable equipment has been scrapped, and the total available fleet of rigs, fracking pumps, and other well service equipment is considerably smaller than what it was during the boom years of shale drilling.

Precision Drilling is one of the companies that spent years rightsizing its equipment and its balance sheet. This was a company on the precipice of bankruptcy at the depths of the oil downturn. However, it has recovered rather spectacularly thanks to a healthier oil services industry and an aggressive debt repayment plan. From 2015 to the most recent quarter, it has cut its debt load in half.

The company has also returned to profitability in the past 12 months as pricing for its drilling rigs has recovered significantly. U.S. and Canadian rates per day of service are up 73% and 66%, respectively, over the past 12 quarters.

Despite the strong recovery in profitability and significant deleveraging of its balance sheet, Precision Drilling’s stock still sits at a discount to its tangible book value and trades for 3.9 times free cash flow. Considering management’s intention to keep paying down debt and start buying back stock, this stock looks too cheap to ignore.

Growth on sale

Matt DiLallo (Brookfield Infrastructure): Units of Brookfield Infrastructure Partners have lost more than a quarter of their value from their peak this year, while its corporate twin, Brookfield Infrastructure Corporation, has shed roughly a third of its value. That has pushed the global infrastructure company’s valuation down to an extremely attractive price.

Brookfield Infrastructure is on track to grow its funds from operations (FFO) — the standard measure used in this business — by about 10% this year to around $3.00 per unit/share. With units of the partnership currently around $28 apiece, it trades at 9.3 times FFO. Meanwhile, the economically equivalent corporation sells for roughly $32 per share, putting its valuation around 10.7 times FFO. Both are phenomenal bargains, considering that the S&P 500 trades at more than 19 times earnings.

The utilities, energy midstream, transportation, and data infrastructure company trades as if it’s not growing. That couldn’t be further from the case. It expects to grow its FFO per unit/share at more than 12% annually over the next three years.

Fueling that outlook is its strong organic growth and its capital recycling strategy. Brookfield Infrastructure benefits from inflation-linked contracts, which are driving strong earnings growth these days. Meanwhile, the company recently completed its needle-moving Heartland Petrochemical Complex in Canada, which should be a meaningful growth driver over the next year. In addition, the company and its partner Intel expect to finish their semiconductor fabrication facilities next year.

Brookfield Infrastructure also has a knack for completing value-enhancing acquisitions funded by asset sales. It has sold nearly $2 billion in assets this year, which it has redeployed into three data center businesses and a leading global container leasing company. Those deals should drive incremental FFO growth in 2024. Brookfield is targeting another $2 billion in asset sales in the coming year. That will give it more capital to deploy into higher-return investment opportunities, which should be plentiful in the current environment.

Given its strong growth profile, Brookfield Infrastructure’s dirt-cheap valuation makes either entity a no-brainer buy right now.

Cheap, if you look across the full cycle

Jason Hall (Enphase Energy): I’ll start with the cold, hard reality. The next few quarters are probably going to be bad for Enphase. Revenue fell 22% in the third quarter, and management is guiding for more than a 50% drop in Q4 sales from last year. It’s an ugly time in the solar cycle.

But this is exactly why investors should be compelled by Enphase. Solar, despite its wonderful secular tailwinds, is going through a painful downturn right now. This is normal. It’s a cyclical business, and the sharp increase in interest rates is one factor that has business slowing. This isn’t the first time it’s happened; to the contrary, this is normal for many industries.

Fortunately for investors, Enphase management built the business to thrive across the cycle. By utilizing contract manufacturers, fixed operating costs are manageable, and the company has almost $1.8 billion in cash and roughly $500 million more cash than debt, and it continues to generate positive cash flow.

Yet the stock trades for a song. At less than 14 times operating cash flows, this is the cheapest its shares have ever traded for since it started generating positive cash. Yes, those cash flows may contract in the quarters to come, but investors thinking — and investing — with a multi-year horizon will almost certainly be glad they bought Enphase at these prices when so many other investors were selling.

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Jason Hall has positions in Brookfield Infrastructure and Brookfield Infrastructure Partners. Matthew DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, and Intel and has the following options: long January 2025 $30 calls on Intel, short December 2023 $45 calls on Intel, and short January 2025 $30 puts on Intel. Tyler Crowe has positions in Brookfield Infrastructure Partners. The Motley Fool has positions in and recommends Enphase Energy. The Motley Fool recommends Brookfield Infrastructure Partners and Intel and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.

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