John Lennon recorded a song in the 1970s titled "Nobody Loves You (When You're Down and Out)." But the late singer-songwriter's premise isn't necessarily true when applied to stocks.
I especially have one ultra-high-yield dividend stock in mind. It's down nearly 30% below the high set earlier this year. However, Wall Street thinks that it's a screaming buy.
Downtrending Devon
Shares of independent oil and gas company Devon Energy (DVN 0.19%) have indeed plunged close to 30% below the peak from January 2023. Over the last year, the stock has fallen close to 40%.
To be fair, Devon's downtrend comes on the heels of a spectacular surge. Beginning in late 2020, the stock skyrocketed nearly 8.7x higher. And that return doesn't include Devon's juicy dividend yield, which currently stands at more than 10.8%.
What happened to bring that remarkable performance to a grinding halt? First, oil and gas prices tumbled. This caused Devon's profits and free cash flow to decline. That, in turn, led to the company reducing its dividend payout multiple times. Devon's dividend program features two components, a fixed part and a variable part that's based on excess free cash flow.
However, oil and gas prices have rebounded. Why hasn't Devon's share price followed suit? One key issue is that many investors still worry that an economic downturn could be on the way that would reduce the demand for oil and gas.
Why Wall Street likes Devon Energy
Of the 32 analysts surveyed by Refinitiv in November, 10 rate Devon Energy stock as a strong buy. Another 13 analysts rate it as a buy. Nine recommend holding the stock, but none think investors should sell.
What's even more impressive, though, is Wall Street's expectations for Devon over the near term. The average 12-month price target reflects an upside potential of close to 20%.
Why does Wall Street like Devon Energy so much? You can put valuation near the top of the list. The oil and gas producer's shares trade at a forward earnings multiple of less than 6.5x.
Raymond James (RJF -0.07%) is one of the investment firms that view Devon as a strong buy. Analyst John Freeman seems to like the company's stock buybacks, writing to investors in August that Devon "has no fear of repurchasing stock and continues to do so at a torrid pace."
I suspect that some on Wall Street like the idea of a major acquisition by Devon as well. Bloomberg reported a couple of weeks ago that the company is considering acquiring Marathon Oil (MRO 0.11%) and/or CrownRock LP.
Is Devon Energy stock really a screaming buy?
Different investors will probably have different criteria for exactly what makes a stock a "screaming buy." For me, those criteria include a really attractive valuation, strong growth prospects, and a solid economic moat.
Devon definitely checks off the valuation box. Pick pretty much any valuation metric you want, and this stock looks cheap.
I also think the company has strong growth prospects. Granted, the demand for oil and gas can be highly volatile. However, I nonetheless expect an upward trend over the next decade, even with increased adoption of renewable energy sources.
But does Devon have a moat? Not really. The company doesn't enjoy network effects where the value of its products increases as more people use them. It doesn't have brands or patents that give it a tremendous competitive advantage. Devon doesn't claim a huge cost advantage over rivals. There aren't any big costs for customers to switch to competitors' products, either.
Overall, I view Devon Energy as a good stock to buy right now. Its low valuation is compelling. With the dividend yield so high, the stock itself doesn't have to move much to give investors an attractive total return. But while I think the stock is a buy, I won't be screaming about it.
