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IQ Eyes Energy

12/17/2014 9:00 am EST


Kelley Wright

Managing Editor, Investment Quality Trends

I am intrigued—perhaps fascinated is a better description—with investor psychology. Some investors make decisions on how they feel as opposed to analyzing the underlying fundamentals, explains Kelley Wright, editor of Investment Quality Trends.

Take the energy sector for example. I can’t tell you how many people have told me that they are afraid of energy stocks right now.

In the majority of instances, the underlying reason for avoiding the sector is that the price of crude oil is down and that energy stocks have dropped in price.

A quick perusal of our Undervalued category reveals that Chevron (CVX), ConocoPhillips (COP), Exxon Mobil (XOM), and Occidental Petroleum (OXY) are indeed trading near their historically repetitive areas of low-price/high-yield.

Perhaps I am missing something, but isn’t one of our primary tenants to acquire stocks when they offer good historic value?

I mean, help me out here. It isn’t like there has been a recall on energy as if it was flawed and had to be reengineered. I know green energy is all the rage but fossil fuel is still what drives the global economy.

Yes, energy production is up; particularly in the US. It isn’t up so much though that production has permanently eclipsed long-term demand. No, what we are witnessing is a short-term reduction in global demand because of economic weakness in the major economies outside the US.

Okay, so the drillers are getting killed. Apache Corp. (APA), Helmerich & Payne (HP), Murphy Oil (MUR), and Suncor Energy (SU) need crude oil closer to $90 a barrel for their long-term profitability.

Query: How long do you think crude oil will trade at repressed levels? Three months? Six months? A year? No one knows, but I can assure you of one thing; it won’t be forever.

What I do know is that there will be another inflationary period where commodity prices will rise, bond prices will drop as yields rise, and the US dollar will get trashed; it’s baked in the cake.

As to the overall market, I believe that the equity markets are floating on a sea of warm and fuzzy feelings as opposed to economic fundamentals. In my opinion, this has already occurred in the energy sector.

As such, the aforementioned energy stocks offer historically repetitive instances of good values. That you may have to sit with them for a while is a high probability, but the good news is that you will receive some very nice dividends in the interim.

Given that most of them sport outstanding average annual dividend growth of at least 10% per annum for the past 12 years, I would suggest that the odds for further dividend hikes are relatively high.

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