The oil markets have shrugged off concerns about the stability of Saudi Arabia — for the time being.
But now they’re focusing on a whole series of more mundane concerns — a diminishing supply of crude oil and gasoline in U.S. stockpiles … a new, even more dire, forecast of hurricanes that could strike oil facilities in the Gulf of Mexico … the coming winter in the northern hemisphere … and more.
That’s why, despite the supposedly smooth transition of power in Saudi Arabia yesterday, crude oil prices have continued to march higher …
Last night, the main contract traded in New York, light sweet crude for September delivery, closed at a new record of $61.89.
Early this morning, it was up still further, to $62.01 a barrel.
And this afternoon, it got as high as $62.50, ANOTHER new record.
This drove up the Oil Services Holders Trust (OIH) by ANOTHER, hefty 2.3% yesterday.
And if you’ve been following me daily in Money and Markets, you haven’t missed a beat with this dramatic surge: You’ll remember how I alerted you to the blast-off that it staged on Friday, July 22 (point “A†in the chart).
And you’ll also remember that I told you this blast-off was just the beginning of a major uptrend (starting at “B†in the chart). Well, now, I can tell you that, at this juncture (point “Câ€), we have RECONFIRMATION that the uptrend is ongoing.
As you may imagine, the options on these stocks have jumped even more dramatically. For example, the first three Larry recommended in his new energy options service have risen 48%, 52% and 134.8%, in just 13 days. That’s many times faster than the already rapid surge in the OIH.
So if you have not yet bought this exchange-traded fund … or some of the stocks it contains … or some of the options on its stocks … you now have still another opportunity to do so.
Naturally, corrections are always possible, and you may see one as soon as this week. But, I repeat: They are buying opportunities.
How To Hand Pick
The Best Energy Stocks
If you’ve been actively involved in the markets, you know that there are multiple approaches that can work — or not.
For your conservative funds, you should aim primarily for steady income, with relatively reliable capital gains as a secondary goal.
That’s why I like the Canadian royalty trusts specialized in energy — their dividends have been close to double digits and their gains have been almost non-stop.
With Enerplus (ERF), for example, subscribers following my Safe Money Report should have just reaped gains of 60.7% (with dividends and before commissions). I told them to do that with half of their shares, while holding the other half of their position for still further gains.
Sure enough, the company has paid out 35 cents Canadian (28.6 cents U.S.) in distributions every month this year. But business is going so well, the trust just said it will now boost its August payout to 37 Canadian (30.2 cents U.S.). Plus, the company’s $387 million buyout of Lyco Energy will boost daily production by 7,000 barrels of oil equivalent.
Meanwhile, another, similar Canadian royalty trust I’ve recommended in Safe Money, also in the energy sector, has jumped 28.3% in value just since June 1. These capital gains are not my primary goal. But they’re certainly a great added bonus. (See my report for more details.)
For speculative money, the purchase of options is ideal. You don’t have to borrow money. You don’t have to commit a lot of capital. All you do is seek to buy them low and sell them high, like a cheap stock. If you’re wrong, you CAN lose your entire investment plus commissions, but never a penny more. And if you’re right, you can make a not-so-small fortune. (See Larry’s report for more.)
Plus, a good, middle-of-the road approach — not conservative, not speculative — is to pick out the very best stocks and trade them.
How do you go about finding them?
Introducing Michael Burnick
Weiss Research’s resident stock analyst
For an answer, I talked this week to our resident stock analyst, Michael Burnick. He contributes his analysis to all of our work. Plus he’s the editor of Elite Stock Trader, the only trading service in the U.S. that’s powered by the stock ratings of our affiliate, Weiss Ratings, Inc.
Unlike Larry and me, Michael cares less about the mega-trends in oil markets and more about just finding GREAT companies. His passion is the daily, grinding search for U.S.-listed stocks with the best potential for rapid growth (to go long) … or, sometimes … the most likely to collapse (to go short).
I think you will find my interview with him to be both educational and potentially very profitable …
Martin Weiss: You’ve picked an energy stock. So I assume you started by looking at the energy sector.
Michael Burnick: No. Quite to the contrary. I just ran a search for companies that met all my parameters, and it just so happened that many of them were in the energy sector.
Weiss: Parameters? Please explain.
Burnick: First, I look for companies that get a high grade (A or B) from Weiss Ratings, Inc. And right now, among all the sectors that Weiss Ratings covers, I think it’s safe to say that energy has among the highest percentage of stocks that are rated A or B. That tells you something right there.
Weiss: What does it tell you?
Burnick: For one, it tells you that most of the energy sector stocks are fundamentally solid. I’m talking about consistently good earnings, solid balance sheets, strong cash flow.
Second, it tells you that they’ve got good momentum. Weiss Ratings’ stock model isn’t just based on static fundamentals. It also looks at the dynamics of the movement in the stocks themselves.
Third, it tells you that the model is working! It’s been on top of the energy stocks for many months.
Weiss: Compared to me, sounds like you know as much — or more — about our model.
Burnick: That’s because I use its output every single day. I could either spend weeks crunching through hundreds of variables on my own, or I can save myself all that time and just use the ratings as my starting point.
Weiss: Just a starting point?
Burnick: Frankly, yes. The Weiss ratings gives me a buy list. But then I like to hand pick the stocks from the list.
Weiss: What do you look for?
Burnick: Among other things, I look for a catalyst. A positive earnings surprise. A new product coming out. Maybe a merger or an acquisition.
Weiss: You’re looking to buy BEFORE the news hits?
Burnick: Not necessarily. If you’ve got a high-rated stock, you don’t have to be that smart. It’s OK to jump in after the news because it’s not an isolated event. It’s part of a string of earnings surprises, or a series of acquisitions.
Weiss: Can you give our readers an example?
Burnick: XTO. This is a company that makes acquisitions like clockwork, every month or two.
Weiss: Why?
Burnick: Because that’s what they do. They specialize in buying properties that don’t fit into the portfolio of the majors. They take over, they apply their own know-how, and they squeeze oil out of properties that were supposedly tapped out.
Weiss: Planning to take profits any time soon?
Burnick: Already did. Took a 25% gain earlier this year, and I moved on. That was before commissions, which vary from subscriber to subscriber, as does the actual price they get.
Weiss: OK. Then can you please give us an example of a stock your subscribers are still holding? At the same time, use it as an illustration to help readers who want to find their own stocks.
Burnick: Sure. It first popped on my screen because of its high alpha.
Weiss: Please explain “alpha.â€
Burnick: A measure of the stock’s return over and above what you would expect to see based on the risk you’re taking. Do you like to cook?
Weiss: Not particularly.
Burnick: Anyhow, think of it like baking bread. For every ounce of yeast, you expect it to yield a certain amount of growth. Same thing with alpha. For every measure of risk you take, you expect a certain return. If you can get MORE than average return with the same amount of risk, that’s considered a high alpha.
Weiss: What next?
Burnick: I look for solid business models, high profit margins, strong cash flow from operations, good return on equity. And it just so happens that many of these are found now in the energy sector. The fact that oil prices are surging — that’s gravy, an extra bonus. The companies I’ve picked should do well even if oil is NOT surging.
Within the energy sector, there are three subgroupings — oil producers (mostly the majors), refiners and oil service sectors. I like the last group best.
Weiss: Why?
Burnick: It’s not strictly because the sector is going berserk to the upside, like you’ve been showing with your OIH charts.
The main reason is because it’s where you can find some of the not-so-huge companies with the best profit margins and the best growth rates. Actually, the small- to mid-cap sectors are usually the only place you can consistently find high growth rates. Once a company gets to be a giant in a small club, there’s virtually no more room to grow fast, except maybe with acquisitions.
Weiss: Why do you think Wall Street largely missed this big move in the oil service companies? Why were they so surprised when the stocks shot up?
Burnick: About nine months ago, Wall Street was predicting oil would fall right back down. Think back to last fall. Oil had surged from the low $30-a-barrel range early last year — to the mid-50s by October. Then it dropped sharply to the low-40s. At that point, the consensus was that, at best, oil would stay in the mid-40s and perhaps slide back to the low 30s. They thought it was just a short-term price spike, not a demand-driven uptrend.
Their pitch was: “High oil prices are not going to stick. Don’t expect much new drilling activity. Don’t expect it to be feasible economically to go after new reserves. So don’t buy oil service companies that provide the equipment.â€
Now, with oil above $60, all that has changed. Now, Wall Street folks are beginning to recognize, finally, that the oil price boom has stability and staying power. They’re saying that $50 per barrel is the new floor. A bit late to the party as usual, but I think they’ve finally got it right. That gives explorers confidence to go out there and sink new wells. Why not? If you can pull oil out of the ground for under $20 per barrel, wouldn’t you?
Weiss: OK. Enough theory. Now get down to actual practice — your favorite pick.
Patterson-UTI Energy
Burnick: One of them is Patterson-UTI Energy, which is a current Elite Stock Trader position. Symbol PTEN on the Nasdaq. Been on my buy list for a long time. Very high Weiss Rating. Quarterly earnings up a very impressive 181%.
Weiss: Sometimes these companies have a one-quarter wonder. What made you think this one was different?
Burnick: It has a low PEG ratio — P/E compared to earnings growth. In other words, its 12-month trailing P/E is relatively low, which means it’s cheap. But, at the same time, its expected earnings growth is high, which means it’s actually worth more. This is the ratio that Peter Lynch popularized. And it works.
Weiss: Give me a hypothetical example.
Burnick: Sure. Say a company is selling for 20 times its trailing earnings. Doesn’t sound all that cheap, right? But now say its earnings growth rate is actually projected to be 40% over the next three to five years. You just divide the 20 by 40 and you get a PEG ratio of 0.5. That’s very good. Anything under 1.0 is positive. Anything over 1.0 is not positive.
Weiss: What was Patterson’s PEG ratio?
Burnick: It was 0.28! It was selling for 16 times earnings. Its earnings growth was expected to be 57%. So that gave me the 0.28, which is fantastic!
Weiss: Still at that level?
Burnick: No, but close.
Plus, Patterson has consistent cash flow, it looks good compared to its peer group, and it looks even BETTER compared to the S&P 500 stocks.
Here are some numbers for you. Last quarter, stocks in the S&P 500 Index managed a profit growth of 17% over the same period last year. Not too bad, right?
But look at this: In the same period, stocks in the oil services sector posted average earnings per share growth of 74.9%. A lot better, right?
Now, on to my pick — Patterson. As I told you a moment ago, Patterson’s earnings growth was a stunning 181%! More than DOUBLE the performance of an already-hot sector.
Top-line growth — same pattern. The company’s sales shot up 60%, compared to a 25% sales gains for the sector and only 16% sales growth for the S&P 500.
Here. I put a graph together that compares all these numbers: 
The graph also shows a couple of other things: Patterson Energy is priced at just 19.5 times its free cash flow over the past 12-months, compared to 57 times for the sector and 26.3 for the S&P 500 stocks. So in spite of its superior growth characteristics, Patterson is still a better bargain.
Weiss: What is the Weiss rating?
Burnick: A+ — top of the scale.
Weiss: Makes sense. How have the ratings performed for you overall?
Burnick: Just as well — or better — than the performance you saw published in The Wall Street Journal, when the Weiss Ratings were ranked number one in the country. Congratulations, Martin.
Weiss: I wish I deserved all the credit. But I don’t. If the staff had listened to me, more of the ratings would have been D for “dog.â€
But I also told them to make the model 100% objective — no bullish bias, no bearish bias.
Burnick: I’m glad you did.
Weiss: That makes two of us. Mike, thank you for your support and your ideas. How can readers get your material?
Burnick: I provide analytical support to the entire team — for all the editors, including Larry, Tony, yourself. My own service is Elite Stock Trader. My goal is not to reach for the stars or make triple-digit profits. I just want to beat the S&P 500 by, say, 25 percentage points.
Weiss: Have you accomplished that?
Burnick: Not quite. I figure a hypothetical subscriber following all my recommendations for the one-year ending June 15 should have earned a 26.7% total return before commissions, compared to a 6.6% price appreciation in the S&P 500 index over the same period. That’s a 20.1 percentage-point advantage.
Weiss: Would you say you’re taking more risk or less risk to achieve that?
Burnick: Less risk. If a stock gets a Weiss rating of B or better, that means it has passed through a series of filters that weed out the riskier stocks. When you buy the S&P 500 Index, you may get more diversification, but you don’t get the benefit of Weiss Ratings’ risk filters.
Weiss: Thanks. Let’s talk more about this later, as soon as we get a chance.
Good Luck and God Bless!
Martin
About MONEY AND MARKETS
