Picking Winners in Energy, Oil, and Financials

by Bryan Perry | April 11, 2012 1:00 pm

Some of this week’s takeaways provided fodder for upping our energy weighting here in the United States. Let’s take a quick look at the information:

  1. We got a nice pullback in oil- and gas-related stocks following a blistering rally during the first quarter.
  2. China, the world’s biggest consumer of oil, is orchestrating a soft landing for its economy, so its appetite for oil imports will remain strong.
  3. The Fed has recognized inflationary pressures and should begin to raise rates sometime in early 2013.
  4. In this election season, there will be pressure on President Obama or likely Republican nominee Mitt Romney to allow for increased domestic oil and gas production to help rein in gas prices.

Each of our high-yield energy holdings has undergone a healthy price correction and are at good points of entry in the midst of this short-term price decline for oil. Take advantage of this window and put money to work in SandRidge Mississippian Trust (NYSE:SDT[1]), SandRidge Permian Trust (NYSE:PER[2]), SeaDrill (NYSE:SDRL[3]) and the ETRAC 2x Leveraged Long Alerian MLP Infrastructure ETN (NYSE:MLPL[4]) at current prices.

It may sound like I’m repeating myself from last week’s emphasis on energy assets, but I view the current backdrop for oil prices simply as a pause before oil-related stock prices push back to their highs from early March. Spring weather means lower electricity bills, and when Memorial Day weekend approaches and the summer driving season kicks in, I think we’ll see crude prices ramp back up to $1110 per barrel.

The Fed’s now telegraphing that interest rates inevitably will go up in the next year or so, which is sweet music to both the mortgage REITs and floating-rate corporate ETFs. Even though the Fed is committed to keeping the Federal Funds Rate at 0.00% to 0.25% for the next year or so, the long end of the yield curve already is starting to tick higher. This widens the spread by which companies such as American Capital Agency (NASDAQ:AGNC[5]) and Two Harbors Investment (NYSE:TWO[6]) generate those whopping dividend yields of 16.66% and 15.89%, respectively.

For our floating rate funds Franklin-Templeton Ltd. Duration Trust (NYSE:FTF[7]) and the Nuveen Floating Rate Opportunity Fund (NYSE:JRO[8]), both are well-positioned to trade significantly higher in the next two years when the Fed starts to tighten fiscal policy by raising short-term interest rates. It’s still early, but both funds are performing well in anticipation of this eventuality.

In addition to the mREITs and floating-rate funds, banks and brokerages also stand to benefit from interest rates climbing as it pads their margins for lending rates. Use this sell off to initiate and add to positions in BGC Partners (NASDAQ:BGCP[9]) and New York Community Bancorp (NYSE:NYB[10]). Both stocks have beautiful charts, having consolidated their technical breakout moves, and are now in oversold territory.

The Supreme Court’s deliberations on Obamacare already have the president in attack mode. His latest highly charged criticism of the high court could mean that inside information indicates the mandate for his health care plan is likely to be found unconstitutional. As such, shares of big-pharma companies have started to trade more favorably, and our holding in GlaxoSmithKline (NYSE:GSK[11]) stands to benefit from the perception of a more lenient regulatory environment.

Carl Icahn won his shareholder battle with CVR Energy (NYSE:CVI[12]), parent of CVR Partners L.P. (NYSE:UAN[13]), with 64% of stockholders tendering shares at his $30 offer price. There’s a lot of talk now from Icahn and the board of CVI Energy about the splitting up of assets to realize high shareholder value. That would mean that CVR Partners will be sold at some point. UAN is trading higher today in response to this speculation, as well as Monsanto’s (NYSE:MON[14]) very bullish Q1 financials reported yesterday citing strong corn seed demand. .

Shares of Lorillard (NYSE:LO[15]) are breaking out to the upside again after a six-week period of consolidation. I’ve been highlighting this name on our Top Buys list for the past month at the $128 to $130 level.

Endnotes:
  1. SDT: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDT
  2. PER: http://studio-5.financialcontent.com/investplace/quote?Symbol=PER
  3. SDRL: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDRL
  4. MLPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=MLPL
  5. AGNC: http://studio-5.financialcontent.com/investplace/quote?Symbol=AGNC
  6. TWO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWO
  7. FTF: http://studio-5.financialcontent.com/investplace/quote?Symbol=FTF
  8. JRO: http://studio-5.financialcontent.com/investplace/quote?Symbol=JRO
  9. BGCP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BGCP
  10. NYB: http://studio-5.financialcontent.com/investplace/quote?Symbol=NYB
  11. GSK: http://studio-5.financialcontent.com/investplace/quote?Symbol=GSK
  12. CVI: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVI
  13. UAN: http://studio-5.financialcontent.com/investplace/quote?Symbol=UAN
  14. MON: http://studio-5.financialcontent.com/investplace/quote?Symbol=MON
  15. LO: http://studio-5.financialcontent.com/investplace/quote?Symbol=LO

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