6 Solid Energy Patch Plays

10/12/2011 10:00 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

There are many good options in the sector for good times and bad, and you may see both in coming months, writes Elliott Gue of The Energy Strategist.

Although the risk of the US slipping into recession remains elevated, our proprietary Recession Radar indicates that a prolonged period of relatively slow growth remains the most likely outcome at this point,

In fact, recent data suggest the US economy has stabilized. Early last week, the Manufacturing Purchasing Managers’ Index (PMI) ticked up to 51.6 in September—an increase of 1 percentage point from the August reading. Monthly PMI numbers greater than 50 indicate that economic activity picked up in the manufacturing sector.

In April and May, the stock market began to swoon when US economic data consistently fell short of expectations. A slew of better-than-expected economic data could support a year-end rally in US equities.

The EU’s ongoing sovereign-debt crisis remains a wildcard. Policymakers have moved slowly to address the problems in Greece, Italy and Spain, reminding voters of the downside of fiscal integration.

Despite the popular outcry against bailouts, policymakers understand that an Italian or Spanish government default would devastate the global economy, strain the EU financial system, and potentially touch off a global credit crunch.

Recent news flow suggests that the EU may announce a coordinated plan to recapitalize the region’s embattled banks and support fiscally weak national governments before the G20 meets in early April.

In the near term, expect the uncertainty to roil equity markets and cap any upside. We continue to recommend a three-pronged investment strategy:

  • Buy high-yield safe havens. Our top picks include MLPs and dividend-paying stocks such as SeaDrill (SDRL).
  • Buy cheap growth. The recent selloff of cyclical energy names reflects the growth scare that began earlier this summer. In many instances, this downdraft doesn’t reflect industry fundamentals. For instance, compare the discrepancy between the Peabody Energy Corp’s (BTU) stock price and the tight supply-demand balance for seaborne metallurgical coal.

Meanwhile, the dramatic pullback in shares of Weatherford International (WFT) and Schlumberger (SLB) belies the fact that Brent crude oil remains above $100 per barrel, and is up 25% to 30% year over year.

  • Consider some shorts and hedges. We recently booked a sizable profit on half our short position in First Solar (FSLR). Investors seeking to go short should consider Diamond Offshore (DO) and First Trust ISE Revere Natural Gas (FCG).

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