Wall Street is full old-timey investment sayings. One of the best adages goes “Bulls make money, Bears make money, but Pigs get slaughtered.”
There’s some evidence of truth to that statement. Being too greedy when it comes to investing can have major portfolio implications and the concept of mean reversion is very real. No one ever lost money taking some profits on a stock. While it can be hard to do, selling and trimming back some of winners is an important piece of portfolio rebalancing.
After a year of torrid growth, plenty of energy stocks have surged to new highs. Gains in hydraulic fracturing, production and prices for the underlying commodities have lit a fire under a variety of stocks in the oil and gas industry — with the broad based Energy Select Sector SPDR (XLE) up about 20% this year.
With that said, it could time to trim back positions in some winning energy stocks. And with the new year quickly approaching, today could be a prime opportunity. Here are five of the best candidates to trim after a 2013 surge.
Shareholder activism can be a wonderful thing when it’s done right. Known for its iconic green-and-white trucks, Hess (HES) had been stuck in neutral as its peers dove head-first into shale production and “sexier” unconventional resource plays. HES stock languished and was passed by in many portfolios.
Enter activist hedge fund Elliot Management. After calling management at HES inept, Elliott pressured the firm to focus on its core business of E&P operations and reduce its exposure to refining, marketing and other ventures. After a bitter proxy battle, the two came to an agreement and Hess began divesting assets and shifting focus.
Well, those efforts seem to have delighted investors, as HES stock has surged more than 48% year to date.
Given those huge gains, investors may want to trim back their position in HES shares — especially given Hess’s recent weak earnings guidance. For the fourth quarter, HES estimates that it will realize a $6 per barrel decrease in its average selling price for crude, in addition to pumping out less oil than expected. All in all, HES will earn than it did in the third quarter.
For investors, the time to sell some HES stock is now if they want to capture those hefty gains.
It takes an awful lot of muscle and technological know-how to frack and drill unconventional wells. So the oil service industry is poised to continue churning out hefty profits in years to come. That fact has benefited mid-cap maker of drill-bits, pipes and other rig equipment Dril-Quip (DRQ).
Being a potential buy-out candidate hasn’t hurt either.
Some analysts have proposed that DRQ could be one of the next targets for industrial titan GE (GE) as it expands into the oil and gas space by buying up smaller energy stocks. That speculation, along with stronger revenues and earnings, have propelled DRQ stock upwards — to the tune of 48% year to date.
That’s a big gain for such a small firm, and while there isn’t anything particularly wrong with DRQ or its prospects, it has gotten ahead of itself in terms of the “buy-out” potential. DRQ shares now trade for a P/E of near 30 and forward P/E of around 21. That’s about double the oil service sector’s average and about 5% higher than its normal P/E range.
Given the gains, investors may want sell a bit of DRQ stock.
There’s no denying that EOG Resources (EOG) is the reigning kingpin in the Eagle Ford shale. The firm has some of the largest acreage in the region and continues to churn out hefty oil and natural gas liquids production in Texas.
That fact hasn’t been lost on investors, who continue to bid up shares.
Overall, EOG stock is up 30% this year, on top of the 23% it gained in 2012. Which means early investors are sitting on some pretty hefty capital gains, and EOG could represent one of the “piggiest” stocks in the oil and gas sector. Trimming back some your EOG stock makes a whole lot of sense after such a huge win.
Besides, EOG is getting expensive. Shares are currently going for a P/E of nearly 40 and forward price-to-earnings metrics are still an industry high at 18.
EOG isn’t a bad firm — it’s just so darn pricey.
Like EOG, Continental Resources (CLR) is a beast in its core production area, North Dakota’s Bakken shale. And like EOD, CLR has seen its production surge as it continues to frack the formation with gusto.
And like EOG, CLR stock is up huge in 2013 — racking up an impressive 43% gain for shareholders. Which means it may be time to sell some and move on to more undervalued pastures. That position trimming could even be more prudent because rising production for CLR is a bit of a Catch-22.
That’s because there’ still a huge glut of Bakken crude that can’t leave the region. Crude-by-rail is growing, but there’s still insufficient pipeline infrastructure to carry CLR’s production down to refiners on the Gulf. Overall, lower WTI crude prices because of the glut hinders CLR’s earnings and rising production.
And with investors in CLR shares up big, the time could be right to sell some of those gains and move on.
With so much natural gas coming from our shale fields, the promise of exporting that bounty is quickly becoming a reality for the U.S. As one of the first firms to win export approvals for its Sabine Pass facility, Cheniere Energy (LNG) shares have surged nearly 120% year to date.
With the Sabine Pass scheduled to begin liquefied natural gas (LNG) shipments in 2015 and construction starting on a second LNG facility in Corpus Christi, the long-term promise is certainly there for LNG stock.
However, the glaring problem is that LNG doesn’t actually make any money right now. Contract royalties from when it was an importer still trickle in, but as an exporter, LNG hasn’t yet produced a profit.
On the flipside, competing energy stocks — Dominion (D) and Spectra (SE) — have a breath of assets that continue rack up earnings and pay dividends. Investors are being paid to wait while their LNG facilities take shape.
LNG has no such cushion, and with the stock up so huge in 2013, investors may have already priced in much of the export growth into the stock. It’ll be better in the longer term, but as we go into the new year, trimming Cheniere is prudent.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.