A Sector 'Primed' for Appreciation

06/06/2013 7:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Energy demand is leading this sector higher, says Michael Cintolo of Cabot Wealth Advisory.

I like liquid leaders—rapidly growing companies whose stocks trade lots of volume every day, hence allowing hundreds of institutions to pile in.

These days, there's so much money floating around (thousands of mutual, hedge, and pension funds) that when the whales decide to build a position in, say, LinkedIn (LNKD), the stock can skyrocket!

If you're a growth stock investor, my main message to you is to consider restricting most, if not all, of your purchases to stocks that not only have a great chart, a great story, and great growth numbers, but also have the trading volume that allows the Big Boys to buy in. In my opinion, a portfolio full of smaller, less liquid names carries far more risk, and little (if any) additional reward.

The current market remains in great shape, although after a nosebleed run for the major indexes and many leading stocks, I can't say we're at a pristine buy point.

Still, one of the unsung bullish characteristics of this year's advance has been plenty of healthy rotation—for two or three weeks a couple of sectors will light up the sky, but when those groups pause, others take their place and get going. That's what has kept the market advance in such good shape.

I look for stocks and sectors that haven't run straight up for the past six or seven weeks. Instead, I like groups where money is just starting to rotate in, after a few weeks of back-and-forth action. And one that fills the bill is oil service stocks.

If you examine the S&P Oil & Gas Equipment SPDR (XES), you'll see a peak in mid-February, followed by a couple of healthy shakeouts during the next two months. But the fund found support at its 40-week moving average, and is now working on its fifth straight up week as it tags new-high ground.

Fundamentally, oil prices aren't advancing, but they've generally traded in the $85 to $100 per barrel range for the past year. And, of course, natural gas drilling is going nuts here in the US, thanks to the various shale plays. That leads to a healthy environment for the sector.

So how can you play it? One easy way is to just buy XES. Or if you prefer, go with the Market Vectors Oil Services Fund (OIH). Both will give you exposure to the group as a whole.

One of the individual stocks that I'm watching is FMC Technologies (FTI), a leader in sub-sea trees and high-pressure valves and fittings—all the stuff that deepwater drillers need.

Earnings have advanced every year since 2004 (even through the bust period), and while this year's bottom line should advance "only" 17%, next year it's expected to grow 36%. The stock is hitting all-time highs, after a sharp shakeout in April.

My other idea is more income-oriented. SeaDrill (SDRL), the dominant deepwater driller in the world, has a huge backlog and tremendous cash flow. Management is looking for big increases in that cash flow in the years ahead, as the company adds to its rig fleet. The stock is also punching out toward new high ground, and the dividend is north of 8%.

And, if you're wondering, both stocks trade plenty of volume, telling you big investors are involved!

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Related Articles:

Oil Services vs Crude Oil

4 Ways to Get Down and Dirty in the Energy Patch

SeaDrill Rigs Its Future Potential

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