Monday, April 25, 2011

Energy Stocks

Goldman caused a big stir last week after a leaked memo hit the Street telling its clients that the risk-reward ratio for energy stocks had turned negative. The note was particularly interesting for two reasons. First, because Goldman has traditionally been very bullish on commodities, and secondly, because it was a short-term call, laced with the usual caveats the investment banks use to hedge themselves if their thesis turns out to be wrong.
Although the report did weigh on cash and equity energy prices, the bottom line is that it's any ones guess what will happen in the short run. Oil and oil stocks could trade all over the map or they could just sit around like bumps on a log and do nothing. But for investors looking to make long-term investments, that short-term price action is totally irrelevant. That's for all the big, bad traders of the world trying to time the market to worry about. Investors are focused on the big picture, and nothing more than a quick look at the current energy landscape reveals more than a few compelling reasons why investing in energy for the long run makes sense.

Fundamanetal Support for Energy
1.) Political Risk-Can anyone disagree that the Middle East has embarked upon a seminal moment that could forever change its political and economic makeup? Great investing is all about identifying trends, and there is no stronger trend than that of political tension in the Middle East right now. It matters for many reasons, none more than the fact that OPEC is responsible for 42% of the worlds crude production. So any additional signs of stress in the region could have a serious impact on global supplies.
2.) Supply & Demand-The simple fact of the matter is that global proved reserves of crude continue to decline as old wells run dry and new wells become increasingly difficult to find and exploit. It comes on the heels of growing to steady demand from the developed economies and surging demand from emerging economies like China, India and Brazil. The relationship between supply and demand is already tight, with very little slack built into the system to compensate for production disruptions. That is a virtual cocktail for rising prices and higher profits for energy companies.
3.) Inflation-This is probably the most under appreciated aspect of investing in energy, fueled by growing concern over a weak Dollar and record stimulus from the Central Banks of the world. Early signs of inflation will make investing in hard assets and hard asset companies attractive.
So with a clear view on the long-term dynamic affecting energy, let's go ahead and take a look at some of our favorite picks in the category.
Top 4 Energy Stocks
Drilling services companies have been very hot as exploration and production companies boost capital spending to capitalize on sky high crude prices. One of the best in the field is Nabors Industries, Inc. (NBR - Analyst Report), an on-shore drilling services company with a market cap of $9.1 billion. This Zacks #2 rank stock has an average earnings surprise of 17% over the last four quarters and analysts looking for 33% earnings growth next year. 

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