Buy Into the Energy Conundrum

The energy sector is now at fair value after being 16.3% overvalued at the end of March and 9.6% undervalued at the end of June.

As the sector has cheapened, the number of strong buys has sunk to the current 28, down from 43 at the end of June -- but up from 25 a week ago. It appears that the valuations in the energy sector better reflect where energy prices should trade, rather than where crude oil actually is trading.

The bottom line is that energy stocks continue to cheapen while crude oil stays high, and this supports a topping-out of energy costs led by Nymex crude oil futures.

The Energy Select Sector SPDR(XLE Quote) has tracked the general price trend in commodities, with a 52-week high set at $60.15 on May 11, the day after that Fed rate hike. The trading range low of $50.01 was set on June 13. I show semiannual support at $51.57 with a monthly pivot of $54.96 and quarterly resistance at $60.70. The Energy Select Sector SPDR is above its 50-day and 200-day SMAs of $55.78 and $54.16.

Back on June 28 I set my screen to find energy stocks rated buy or better according to ValuEngine, with a market cap between $1 billion and $5 billion, and also at least 10% undervalued and below their 200-day simple moving average. (Crude oil is above its 200-day SMA of $66.77 and the buy-rated stocks are below theirs, which illustrates how cheap these stocks are relative to the commodity.)

Of these nine stocks, five haven't nosed above their 200-day moving averages since then, affording investors an extended chance to add shares for trading around core positions. Remember, my strategy is to maintain a core position and trade around it, buying and selling shares to capture profits from its volatility.

Encore Acquis(EAC Quote) rebounded 25% from its close of $24.48 on June 27 to a test of its 200-day simple moving average of $30.64 on Aug. 2. Investors should consider adding to positions on weakness to my monthly value level of $23.16.

Grey Wolf(GW Quote) traded above its 200-day SMA on several occasions since June 27, but my semiannual pivots at $7.42 and $7.74 provided a drag that kept the stock below its fair value. The low end of the trading range between tests of the 200-day SMA has been the $6.60 level, where investors should consider adding to this position.

Cheapening Energy Stocks Valuations reflect where oil should trade, not where it is trading
Company/Symbol	Aug. 15 Price	Rating	% UV/OV	Fair Value	Mom	5-Wk MMA	Value Levels	Pivots	Risky Levels	200-Day SMA
Encore Acquis (EAC)	$27.71	BUY	-5.0%	$29.16	RM	$27.67	23.16 M		31.36 S	30.42
Grey Wolf (GW)	$7.15	BUY	-19.5%	$8.88	RM	$7.25	5.77 A	7.42 S/7.74 S	9.12 Q	7.60
Helix Energy (HLX)	$35.60	S BUY	-27.9%	$49.40	RM	$36.51	27.75 A			37.21
Hugoton Royalty (HGT)	$30.10	BUY	-12.9%	$34.56	RM	$29.68	24.95 M		36.62 S	32.40
Helmerich & Payne (HP)	$24.80	BUY	-33.7%	$37.42	OS	$26.98	21.50 A/19.83 A	25.64 S/28.66 S	33.26 Q	31.79
Oil States (OIS)	$29.96	BUY	-29.8%	$42.65	OS	$31.72	none	34.39 M	39.48 Q	35.24
Patterson UTI (PTEN)	$26.72	BUY	-29.7%	$38.02	RM	$26.59	24.93 A	26.16 S/27.65 M	29.93 S/30.61 S	30.80
Rowan (RDC)	$31.22	BUY	-30.9%	$45.19	OS	$33.62	25.34 A	34.16 S/35.22 S	41.60 M	38.92
RPC (RES)	$20.78	S BUY	-26.4%	$28.33	F	$21.74	16.42 A/14.55 S	21.30 S	25.74 Q	24.15
Key: OB, overbought; DM, declining momentum; RM, rising momentum; OS, oversold; M, monthly; Q, quarterly; S, semiannual; A, annual. A value level is a price at which my models project that buyers will emerge; a risky level is a price at which investors are likely to reduce holdings, according to my models. A pivot is a value or risky level that has been breached in its particular time horizon; the stock will likely trade around this pivot. Source: Global Market Consultants