If you are an investor, it’s hard not to be attracted to energy stocks. Though the energy sector has seen its share of turmoil –Â as when OPEC decided in 2015 to flood the market with oil, driving barrel prices down –Â energy has performed well over time and has a lot going for it in this decade.
Like food, energy is a commodity for which demand is constant and growing with the world’s rising population and increasing industrialization. While some of that demand will be met by alternative energy sources like solar and wind generation aimed at achieving global environment imperatives, it will be some years before these sources cut into overall demand for oil and natural gas.
Perhaps the biggest booster of confidence in the energy sector is the explosion in shale oil production in the U.S.
All the benefits from the energy surge
One effect, certainly, is to ease U.S. dependence on imported oil, especially from the Middle East, moving it closer to true energy independence, a dream of U.S. presidents going back at least to Jimmy Carter in the '70s when huge gas lines sprung up across the country after OPEC dramatically cut world supply.
But another effect has been to enable the U.S. to be an exporter of oil, selling product on the world market, increasing its clout as a global trader.
And last, the energy sector now has a friend in the White House in Donald Trump. During his campaign, he vowed to strip off regulations on American business. One of his early acts as president was to approve completion of the much-disputed Keystone XL pipeline, allowing the flow of Canadian oil to Gulf Coast refineries in Texas and on to world markets, lifting the block put on it by the Obama administration.
The pipeline will convey up to 830,000 barrels of crude oil each day, and its approval was seen as a major victory for U.S. oil interests, even as environmentalists vow to block it in the courts. We’re also seeing a surge in natural gas production with prices coming down accordingly, which is a real boon to homeowners. It’s an opportunity to cost out its advantages over other fuel options, such as propane gas for some households' functions.
All the factors are making energy a hot sector. Energy outperformed all other Standard & Poor's sectors in 2016, offering investors a 24% return.
2017 outlook: an uptick in energy stock value
The outlook for 2017 is understandably strong as well, in no small part because of an historic move by OPEC late last year to tighten production by its member nations. The aim of this move was to drive prices up and boost the sector after a number of down quarters, pushing earnings into positive territory for the first quarter of this year.
According to a Zacks earning preview, the energy sector is forecast to earn $8.1 billion in the first quarter after suffering a loss of $1.6 billion in the first quarter of 2016. But here comes the cautionary note for investors interested in energy stocks. A rising tide may lift all ships, but that doesn’t apply to a rising industry sector. Some stocks will do well – extremely well – but others will struggle.
Here’s the cautionary note. Don’t buy the sector. Buy individual stocks after doing in-depth research. Yes, you could buy the entire sector, reasonably believing that the fast ponies will outrun the dogs and that the wins by the fast ponies will more than compensate for the losses by the dogs. But with a sector as strong as energy it makes a lot more sense to play only swift ponies and reap the far larger rewards.
Zacks: tools for rating energy stocks
One handy set of tools comes from Zacks, and a good place to start is its list of strong buys. Also look at its Earnings expected surprise prediction (ESP)Â program –Â Earnings ESP Filter for stocks with the potential to surprise the market with stronger-than-expected earnings. Under the Zacks system, top-ranked stocks are graded as No. 1. It goes down from there, with stocks that should be sold ranked No. 4 and must-sell stocks rated No. 5.
The idea is to trade stocks before earnings reports come out for the quarter, buying or selling as needed, reaping the rewards if the stocks you buy go up and escaping punishment if they do poorly.
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