Stick with the Standouts

07/21/2008 12:00 am EST

Focus: STOCKS

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Louis Navellier, editor of Blue Chip Growth, says investors need to stay with the strong sectors in a lousy market and he recommends one strong performer in the energy area.

The upcoming second-quarter earnings season represents the fourth down quarter in a row for the Standard & Poor’s 500. Damage will predominantly be in the financial and consumer industries and sectors such as airlines and automotive where high energy prices have taken a toll.

Alongside our much-anticipated earnings, we’ll see a slew of other data about the first half of the year in the coming weeks. Most of the reports point to a prolonged stagflation environment for the near future, and indicate that the economic conditions we’ve seen so far in 2008 are here to stay for a while longer. Rising commodity prices, especially food and energy inflation, will persist.

With over 70% of the US economy attributed to consumer spending, it is hard to imagine we’ll see significant growth in the near future [because of] the two areas that are cutting into American bank accounts the most: food and gasoline.

Crude oil has soared from $100 to $150 per barrel in just six months, and predictions of $200 crude oil are becoming more commonplace on Wall Street. Recently, the International Energy Agency (IEA) cut its five-year forecast for global oil demand as more consumers park their gas-guzzling vehicles. But the IEA also pointed out that sluggish oil production would keep inventories tight despite moderating demand.

In addition, the IEA recently predicted global consumption of oil products will increase 1.6% a year on average through 2013 due largely to growing demand from emerging market countries, including China and India. All this adds up to a tight supply that can’t keep up with demand.

Devon Energy (NYSE: DVN) is involved primarily in energy exploration and production, and has proven reserves of 677 million barrels of oil, 9 trillion cubic feet of natural gas, and 321 million barrels of natural gas liquids.

The company has grown aggressively through acquisitions and then divesting operations in unprofitable or at-risk areas. Devon recently completed a $2.2-billion sale of its assets in Equatorial Guinea, and has recently agreed to sell its operations in Cote d’Ivoire for $205 million.

Devon is most famous for its mega find in the deep water 175 miles off the coast of Louisiana, which is estimated to contain up to 15 billion barrels of crude oil. This site could potentially produce 800,000 barrels of oil a day within seven years and account for 11% of overall US oil production!

The numbers behind DVN are equally impressive. In the first quarter, the company’s sales rose by more than 50% while operating earnings almost doubled to $2.74 per share. The analyst community was expecting operating earnings of $2.29 per share, so the stock posted a 20% earnings surprise! And since earnings are what we’re so excited about right now, I have very high expectations for Devon Energy. The stock is a phenomenal buy! (It closed below $99 Friday—Editor.)

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