Checking in on our oil trade from 5 weeks ago … is it time to place another? … how Louis Navellier is sizing up the opportunity in the oil patch today

In our February 19th Digest, we noted that, long-term, our world is moving away from oil, toward renewable energy.

We highlighted a series of facts and statistics supporting this conclusion, one of which was the Biden administration’s plans to make the U.S. a 100% clean energy economy with net-zero emissions by 2050.

But as we wrote in that Digest …

There’s a lot of time between now and 2050 for a profitable oil trade.

We put three potential short-term plays on your radar … XLE, which is the Energy Select Sector SPDR Fund ETF. It holds oil heavyweights including Exxon, Chevron, ConocoPhillips, Schlumberger, Occidental, and Valero to name a few …

The second was Diamondback Energy (FANG), which is a Texas-based energy exploration company …

And, Exxon (XOM), the massive multinational oil and gas company.

It’s been just over five weeks since that suggestion, so where do things stand today?

Over a period in which the S&P has climbed not even 1%, and the Nasdaq has lost nearly 6%, XLE, FANG, and XOM have climbed, respectively, 11%, 15%, and 10%.

These returns mirrored our stated expectations going in …

XLE provided investors a chance to benefit from the broad surge in the oil sector. FANG was a more explosive, concentrated bet. XOM’s gains slightly trailed those of the broad sector, but as we noted it might be considered more of an income play (its dividend yield is a whopping 6%, granted its next ex-dividend date isn’t until May).

 

***So, where does the oil trade stand today now that the global economy is closer than ever to reopening?

Is it time to double-down on an oil bet?

Not so fast, according to legendary investor and the editor of Growth Investor, Louis Navellier.

For newer Digest, readers, Louis is one of the early pioneers of using predictive algorithms to scour the markets for quantitatively-strong stocks. Forbes even named him the “King of Quants.”

This numbers-approach has helped him produce decades of triple-digit winners for his private clients and subscribers. Today, he’s one of the most respected veteran analysts in the industry.

Returning to market commentary, here’s Louis from last Thursday’s issue of Market 360:

… we’re in the midst of a “mean reversion rally.” This is where the stocks that previously lagged suddenly become market leaders.

In this case, some of those market leaders have been in the energy sector.

In fact, the Energy Select Sector SPDR Fund (XLE), which tracks energy stocks, is up about 28%, year-to-date. The Invesco QQQ Trust (QQQ), which tracks tech stocks, is down about 1.5%, year-to-date.

XLE’s climb higher this year is certainly impressive, but the truth of the matter is it is not filled with fundamentally superior stocks, which is why I don’t expect its rally to last.

To understand why Louis isn’t seeing fundamental strength in the oil patch, we can turn to his Portfolio Grader.

 

***The Portfolio Grader is a free diagnostic tool that gives investors an instant snapshot of a stock’s financial strength

It evaluates a security through the same criteria that drive Louis’ proprietary stock selection strategy.

It analyzes eight key fundamental factors:

— sales growth

— operating margin growth

— earnings growth

— earnings momentum

— earnings surprises

— analyst earnings revisions

— cash flow

— return on equity

Back to Louis on how some of oil’s biggest names measure up in the Portfolio Grader:

XLE’s top five holdings are Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), ConocoPhillips (COP), Schlumberger Ltd. (SLB) and EOG resources, Inc. (EOG), which are up between about 23% and 43%, year-to-date.

Again, this is an impressive performance in what’s been a particularly volatile market these past few weeks.

However, when you plug those stocks into Portfolio Grader, their fundamentals actually aren’t much to sneeze at.

 

 

As you can see above, they all earn a C-rating for their Total Grade, making each stock a “Hold.”

In addition, their Fundamental Grade is either C- or D-rated. This tells me that these stocks’ fundamentals are anything but superior.

 

***These grades help highlight the need for investors to distinguish between shorter-term momentum and longer-term strength

As any veteran investor will tell you, the stock of a mediocre-to-poorly-run company can still make you a ton of money … for a time.

Look at what happened with GameStop.

Earlier this year, its share-price became wildly detached from the fundamentals of its core operational strength as a business. Investors who timed their trade well generated massive returns that didn’t reflect the condition of GME’s underlying business.

So, short-term momentum can drive a stock price for limited stretches. But a profitable long-term investment requires a greater focus on fundamentals.

With this in mind, what’s the fundamental picture for oil? Why has it been rising recently, and what’s the longer-term outlook?

Back to Louis:

The truth of the matter is crude oil prices have surged in the wake of the Biden administration’s cancelation of the Keystone Pipeline as well as a drilling ban on federal land.

Crude oil prices are also benefitting from a worldwide economic recovery led by China, emerging markets and the U.S.

Interestingly, the International Energy Agency (IEA), based in Paris, is now forecasting that demand for diesel and gasoline is peaking due to growing market share for electric vehicles (EVs).

The IEA does not expect that the demand for diesel and gasoline will return to pre-pandemic levels. The IEA also forecasted that 60 million EVs will be on the road in 2026, up from 7.2 million in 2019.

IEA Executive Director, Fatih Birol, stated, “We do not think gasoline consumption will come back to 2019 levels again.”

The IEA noted that daily gasoline demand dropped by a record 2.9 million barrels in 2020, down more than 10% from 26.6 million barrels a day back in 2019.

Below is a chart from the International Energy Agency, illustrating this peak gasoline demand.

 

 

An interesting note …

The IEA and the U.S. Department of Energy (DOE) have reported that gasoline demand isn’t just dropping due to the growing popularity of electric vehicles. The improving fuel efficiency of gas-burning cars is having an impact. The DOE reports it expects American gasoline consumption in the transportation sector to peak next year.

As we wrap up, investors can still profit from well-timed, short-term trades in the oil patch. But in the long-term, don’t confuse momentum with fundamentals. Oil still faces huge, long-term headwinds.

Here’s Louis to sum it up:

Before you invest in energy stocks, I urge you to tap the brakes.

Yes, many have posted spectacular performances this year, but crude oil prices may not stay high forever, especially since worldwide crude oil demand tends to ebb in the fall after surging in the spring due to the simple fact that there are more people in the Northern Hemisphere than the Southern Hemisphere.

In other words, a seasonal demand anomaly for crude oil should never be confused with strength.

Stick with fundamentally superior stocks.

Have a good evening,

Jeff Remsburg