All Star Plays on Energy

03/31/2006 12:00 am EST


Ron Rowland

Editor, All Star Fund Trader

"We view any weakness in energy as a buying opportunity," says Ron Rowland, editor of the All Star Fund Trader. Here, he offers his favorite mutual funds and exchange traded funds for investors seeking long-term potential gains in the energy sector.

"The market capitalization of the energy sector as a percentage of the entire S&Ps 500 Index today is 10.3%. Why is this an important figure? First, let's review some history. In 1992, technology represented only 6% of the S&P 500 and grew to 19% in 1998 and 30% in 1999. In contrast, energy's S&P weight climbed from 7% in 1972 to 22% in 1979 to 28% at year-end 1980.

"No, that is not a typo; the energy component was a whopping 28% at the end of 1980. We are nowhere near that level today. In fact, the energy complex could be eerily similar to the mid 1990s when technology began its initial ramp and ultimately crested over 30% in the early 2000's. Could energy be on a similar path? Yes.

"Meanwhile, Chinese and Saudi Arabian officials recently reached a landmark accord on oil, natural gas, and other minerals. Why is this important? I found little, if any coverage of this summit in the mainstream press. That in itself has important investment ramifications. A major deal between China, with an insatiable and growing thirst for oil, and Saudi Arabia, means energy prices are likely to remain high.

"Short-term sentiment is decidedly bearish, as most pundits seem to think last year's gains cannot be repeated. Most observers continue to proclaim the price of oil will decline below the $50 level. This is a sign of the proverbial wall of worry. Savvy investors know that going against the grain can yield substantial rates of return. W e are more likely on pace for what Goldman Sachs calls the super spike phase and $100 per barrel oil.

"Bottom line, if we are even half right the energy bull market can be substantial. And if the herd ultimately comes into the sector, much like the tech stampede in the late 90s, significant returns can be achieved. Stick to your disciplined strategy. With the energy complex, it means you stay long and strong, in the face of the doubting Thomases. We'd be an aggressive buyer of Oil Service Holdrs (OIH ASE) and  PowerShares Dynamic Energy Exploration & Production (PXE ASE)."

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