by Daniel Putnam | August 27, 2013 1:36 pm
Investors have had plenty of chances to make money in the energy sector in recent years, but individual energy stock selection has probably played a greater role than in just about any other area.
Even as refining stocks and smaller players have logged big gains at various points, the sector as a whole has been sluggish compared to the broader market. In the past two years, the Energy SPDR (XLE) has generated a 13.4% average annual return, trailing the 21.2% of the SPDR S&P 500 ETF (SPY). On a five-year basis, SPY has outpaced XLE to the tune of 7.8% to 3.3% per annum.
One reason for this is that the two largest integrated producers — Exxon Mobil (XOM) and Chevron (CVX) — are underperforming, and that’s dragging on the sector’s headline return.
Underneath the surface, though, there are plenty of interesting charts among smaller names — but only for investors who can handle the risk.
One of the most interesting charts belongs to the Canadian oil-sands producer Suncor Energy (SU). The stock lagged in 2011-12 as the weakness in West Texas Intermediate crude — together with transportation bottlenecks — made Canadian oil less competitive. This situation is now reversing, and Suncor has exceeded its upper trendline and put in a series of higher lows. The stock is entering an area where there is less overhead resistance in terms of past trading volume, indicating that more upside could be in the cards:
Concho Resources (CXO), a Texas-based oil and natural gas producer, has a chart very similar to Suncor. CXO is putting in lower highs, it’s approaching its upper trendline, and it’s moving into an area where historical volume has been lighter. Playing this stock for a breakout isn’t a layup by any means, but it’s a strong chart that merits attention:
Kodiak Oil & Gas (KOG) is a small exploration and production company with a market cap of just $2.7 billion, but it also could be the most interesting chart in the energy complex right now. The stock is approaching its 52-week high of $10.31, and it’s closing in on its all-time high of $10.75, set in early 2012. Interestingly, the stock has a high short interest — 16.2% of the float as of July — indicating the potential for a meaningful breakout. Use caution, however, as rapid drops in this name have been commonplace over time.
Outside of this group, three stocks appear to be putting in broad, rounding bases that are characterized by higher lows and 200-day moving averages that are flattening out or turning higher: Canadian Natural Resources (CNQ), Ultra Petroleum (UPL) and Devon Energy (DVN). All three stocks also have poked above their longer-term trendlines, yet all remain on the deep end of their three-year ranges.
The reason for the divergence in these companies’ charts from the rest of the sector is their exposure to falling natural gas prices. However, with the outlook for nat gas beginning to improve, all three stocks have seen their earnings estimates for 2013 and 2014 rise in the past 90 days — a contrast to the rest of the market, where estimates are falling. If natural gas can hold its ground and this estimate-revision trend holds, look for upside in these names in the next 12 months.
Any favorable commentary on an energy stock has to be accompanied by a caveat at this stage: For these positive chart formations to play out in a meaningful way, XLE will likely need to hold above its long-term trendline. While the fund still has room before it hits its lower trendline — 3.5%, to be exact — a break below a long-established support line, and one with four different tests, would signal a turn in the energy sector’s fortunes.
The takeaway: Look at individual opportunities from the long side, but be ready to take defensive measures if the broader sector is unable to hold its ground.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
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