The latest stage of the bull market has seemingly every sector pushing to record highs. Bargain hunters are either looking for a new job or embracing higher valuations. Unless, of course, they’re shopping in the energy markets. Oil stocks remain beaten-down and unloved — which is music to the ears of dumpster divers.
Today I’ll identify three oil services stocks to buy.
Companies in the oil services industry have seen their shares decimated over the past five years. And we’re not talking a garden variety 30% bear market. It’s been an 80%-plus death spiral. But oil stocks started to turn higher in the fourth quarter, and prices are cheap enough to make strategic option plays tempting.
Let’s take a closer look.
Oil Services Stocks: VanEck Vectors Oil Services ETF (OIH)
My first and favorite way to bank on a sector is to do just that — play the entire sector. No stock picking required, no deep dive into which company is the best. Just buy the whole space via a liquid exchange-traded fund. The VanEck Vectors Oil Services ETF (NYSEARCA:OIH) holds the largest companies in the industry, thus offering a diversified bet.
It carved out a potential double bottom last year, showing downside momentum was slowing. Since then, we’ve seen a strong enough rise off the lows to turn the 50-day moving average higher. Its first attempt at breaking through the 200-day was rejected, but I think future attempts will succeed.
OIH has a nice six-day pullback providing a lower-risk entry today. The size of the candles is shrinking and suggests selling pressure is easing. Because of its cheap price tag, naked puts offer a great return on investment — even if the stock treads water for the month.
The Trade: Sell Feb $13 puts for 60 cents.
Schlumberger (NYSE:SLB) is one of the largest players in the space and has a more mature turnaround than OIH. It’s already climbed above its 200-day moving average, putting it further along in the recovery process. Like OIH, SLB stock has retreated over the past week, creating a buy-the-dip opportunity for those willing to bet the new uptrend continues.
One curveball is the company’s earnings report slated for Friday morning. An upside or downside surprise could inject volatility into what has been a fairly steady uptrend. If you survey the prior earnings reports this year, though, there haven’t been any huge gaps.
To mitigate the risk, I prefer bull puts over naked puts if you’re playing SLB. It also has a higher share price than OIH, so the margin requirement would have been higher for naked puts anyways.
The Trade: Sell the Feb $37.50/$32.50 put spread for $1.00. The loss is capped at $4.00.
My final pick is Halliburton (NYSE:HAL), which has a price chart that mirrors SLB. Last year’s double bottom saw an upside breakout that propelled HAL stock back above its 200-day moving average. A spate of high volume up days aided the turnaround and signaled buyers are returning to the fray.
Halliburton’s six-day pullback has been mild and provides a lower-risk entry for those hesitant to chase last week. Halliburton’s earnings report is next Tuesday and does increase the uncertainty a touch. But like SLB, it doesn’t have a history of big moves on these quarterly events.
To limit the loss, I also suggest bull puts for HAL if you’re bottom fishing here.
The Trade: Sell the Feb $22/$19 bull put spread for around 38 cents.
As of this writing, Tyler Craig held bullish options positions in OIH. For a free trial to the best trading community on the planet and Tyler’s current home, click here!