Veteran fund manager and Wall Street Week guru Lou Holland had called it right. More than 18 months ago, he told black enterprise that one of the big comeback stories would be the energy sector. At the time, most investors had not yet heeded the prognostication, rotating their portfolio holdings away from defensive issues to the sexier but more volatile tech sector.
Initially, energy stocks-companies that primarily produce oil and natural gas-had been one of the main drivers of the blue chip, responsible, in part, for the Dow Jones industrial average staying above the 11,000 milestone. But, by September, oil-inspired inflation worries dragged down the Dow, the Nasdaq composite index, and Standard & Poor’s 500 index, affecting sectors from transportation to technology. Analysts, however, believe that the energy sector will continue to show a gusher of positive earnings and solid returns for quarters to come.
Why? The supply of oil will remain tight. Crude oil prices have topped $36 a barrel in recent months, the highest level in 10 years. It has significantly boosted the price of gasoline and home heating oil. (When Holland made his prediction, oil prices had dropped to as low as $10 a barrel.).
This may not bode well for consumers at the gas pump or for those heating their homes with oil. But these developments have boosted the fortunes of major oil producers. Energy stocks haven’t been this attractive since the late 1970s when investors believed that oil prices would hover around $30 a barrel and would rise with inflation. When oil production increased, and Americans became more conservation-oriented, oil prices dropped and energy stocks along with them.
What has also made oil stocks attractive is that the energy stocks are still relatively cheap. Over the past few months, these equities have been selling at a price-to-earnings discount of 40% to the Standard & Poor’s 500, compared to a typical range of 10% to 20%.
Stocks to watch over the next few months: ExxonMobil (NYSE: XOM), an energy bellwether that 16 of 21 analysts from major investment firms have indicated as a stock to “buy” or “accumulate” over the next few months; Chevron (NYSE: CHV), which is ranked by Zacks as No. 7 of 27 integrated oil equities and which received “buy,” “top pick,” or “accumulate” recommendations or better from 19 of 23 analysts; and Texaco (NYSE: TX), which received “outperform,” “accumulate,” and “buy” recommendations from 11 of 17 analysts. According to the analysts, these stocks will continue to be strong performers because they represent the companies with the largest revenues and market cap, superior technology, and solid balance sheets.
What should investors do in the months ahead? Look at these stocks as part of your diversified portfolio. Place underutilized dollars in large-cap and mid-cap names. Just don’t let this prime opportunity in oil slip from your grasp.