Invest With the “1 Percent”: Energy Stocks

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The past year has presented a number of potential bottoms in energy stocks that have resulted in nothing more than dead-cat bounces, so at this point, any buy recommendations tend to get laughed off.

Invest With the “1 Percent”: Energy Stocks

That’s why we like the idea of the “1 percent” approach when it comes to energy stocks today.

Sentiment toward energy stocks has finally settled at some pretty dismal levels as investors have watched rigs get shuttered, inventories rise and demand decline — a triply bearish setup for the bulls.

However, this bad news finally looks priced into investors’ expectations.

For example, our proprietary ETF Weighted Short Interest Ratio for the Energy SPDR (XLE) has nearly tripled over the past three months as short sellers are finally opening up bearish bets against many of the sector’s stocks. This is a contrast to the activity of the past six months, when short interest remained low as traders tried to call a bottom in energy stocks.

A good rule of thumb: The bottom usually happens when everyone stops trying to call for one.

Given this, as well as technical improvement in the space, investors quickly need to consider investing in the sector’s “1 percent.” The following three energy stocks look like the best of the best opportunities right now:

“1 Percent” Energy Stocks: Tesoro (TSO)

"1 Percent" Energy Stocks: Tesoro (TSO)

Texas-based Tesoro (TSO) isn’t new to the “1 percent.” TSO is trading 40% higher year-to-date as its refinery business continues to hum along.

The technical performance of the stock alone warrants the “1 percent” badge on its own, but there’s more.

Sentiment on TSO shares has been affected by the rest of the energy stocks, placing Tesoro in the classification of underloved outperformer. Currently, 47% of the analysts covering the stock have it ranked a “buy,” indicating that there is plenty of room for the analyst community to start upgrading TSO stock as the energy stock landscape improves.

Our models guide TSO toward a target price of $115 by year’s end — about 12% higher — continuing higher in 2016 as it maintains its leadership role among energy stocks.

“1 Percent” Energy Stocks: Chesapeake Energy (CHK)

"1 Percent" Energy Stocks: Chesapeake Energy (CHK)

One of the biggest names within the group for a number of reasons, Chesapeake Energy (CHK), is set to move higher on a technical shift and a little help from its friend, Carl Icahn.

Yes, CHK shares are plenty hated, down roughly 60% over the last year compared to nearly 30% declines for broader energy stocks. That said, CHK is drawing a technical bottom after hitting a low not seen since October 2002.

The bounce from $6 is building the type of momentum that starts to trigger improving scores from our models. Currently, Chesapeake is breaking into an intermediate-term bullish trend support from its trendlines.

And it gets better.

Short sellers are heavily postured on Chesapeake, meaning that any trend improvement will force a short squeeze higher. Add to this the increased flirting from Carl Icahn, and you’ve got potential for CHK to finish the year at $12 (that’s a 35%-plus move).

“1 Percent” Energy Stocks: Transocean (RIG)

"1 Percent" Energy Stocks: Transocean (RIG)

Offshore giant Transocean (RIG) is breaking higher (more than 25% in three days!) as inventories are staring to suggest that we may see some life come back to the energy stocks.

RIG shares made a hard and decisive bounce from the $12 level, posting a triple-bottom pattern. This pattern forges the $12 mark as extremely supportive for the stock. The bounce has resulted in an upgrade of the technical outlook from neutral to intermediate-term bullish as trendlines have shifted to support a climb higher.

Like CHK, the short sellers have been dogpiling on RIG, so the stock’s short interest ratio is moving higher again. This, of course, increases the odds that we will see sharp moves higher as the shorts run back to the market to close their losing positions — by buying shares of CHK from those of us that already own it.

Look for RIG to continue its intermediate-term leadership role against the energy stocks with a year-end target above $18, or at least 10% higher from here.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/1-percent-energy-stocks/.

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