Since the world's first successful oil well began gushing in Western Pennsylvania in 1859, the energy sector has been making fortunes -- and breaking a few for folks who got in late. This year, after energy stocks boomed amid surging crude-oil prices, money is trickling into sector mutual funds.
But are new investors getting in just as energy stocks have tapped out?
"This sector is overbought by any stretch,'' says Sam Jones of Denver's
, who says this would be the worst time to plow into this group.
Natural-resources funds have been one of the best-performing categories this year, according to
. The funds are up 15.4% as a group, compared with a 0.6% rise for the
S&P 500. These funds took in $253 million in May, compared with just $35.5 million in April, according to
Many oil stocks are off today after Saudi Arabia unveiled plans to boost oil production. But several industry experts expect energy stocks to keep gushing. "This is a multiyear expansion that we're going to be having,'' says John Segner, portfolio manager of the
Invesco Energy fund.
Where does this leave the average investor, who is wondering whether there's life left in the oil-sector boom? With several possible choices, thanks to varied mutual-fund options.
Depending on your oil outlook, there are different funds to consider. The $25 million
Orbitex Energy & Basic Materials fund is now taking a bet on natural gas. It's a way to stick closer to home, since most natural gas is produced and consumed in North America, and isn't as directly influenced by international factors.
Portfolio manager Ken Hoffman has recently turned slightly bearish on oil-services companies because, despite increase worldwide demand, those companies are "refusing to put a lot of new money into production,'' he says. Hoffman, whose fund has posted a 16.8% gain so far this year, is particularly negative on drillers, believing that it will take them years to increase their earnings. "Look at
; their earnings are a quarter of what they were at their last peak,'' he says.
Natural gas has been on a tear recently because it went from $1.20 per 1,000 cubic feet last October to $4.40 now, helping the fortunes of stocks that are involved in delivering the stuff. Hoffman likes stocks such as
El Paso Energy
. Those stocks have already gone up 81.8% and 191%, respectively, this year.
For investors hesitant to jump into energy with both feet, this may be a safe bet because it also invests in other natural resources. Recently Hoffman upped his investment in copper and steel, believing that the recovering Asian economies will continue to be big consumers of those metals.
Strong Limited Resources
, portfolio manager Mark Baskir is also sanguine about natural gas. He expects additional price increases to push the stocks higher because of increased energy demand in the U.S.
"There was a lack of drilling in 1998 because we had warm winters and natural gas was trading at $1.50 (per 1,000 cubic feet),'' Baskir says about natural gas. "But it's only recently that we've had an increase in drilling and the supply is not meeting demand, so prices are going up.''
Baskir is even more enthusiastic about oil services and exploration and production companies. Though oil has been trading in excess of $30 a barrel, he says the stocks are being valued as if oil were selling for just $18 to $20, making Baskir think the rally isn't over.
On the oil-service side, stocks that are involved in the handling of oil after it's drilled have zoomed higher due to the
Oil and Petroleum Exporting Countries'
production curbs. Now that the Asian economies have recovered from their 1997 recessions, worldwide demand for oil has surged, causing the oil prices to rise from $10 a barrel in early 1998 to the $30 range.
That's helped out stocks such as Schlumberger, up 34.8% so far this year, and
, up 62.8%.
Baskir is also making bets on integrated energy companies such as
. These stocks haven't participated in the big energy run-up.
"There's more money going to companies and they will do more drilling,'' he says. Further, he says that "if and when the oil prices come down, their earnings will go up.''
If you want to take advantage of those sectors without betting the farm, there's Invesco Energy where portfolio manager Segner has his biggest concentration in oil services and exploration companies. Segner is fond of the entire energy sector, and is avoiding only a few subsectors, including coal and refining. Oil services are his biggest bet, with a 35% weighting.
But even though these funds take different approaches, some financial planners aren't finding the right fit. Lou Stanasolovich of
in Pittsburgh says he's been mulling over getting into energy stocks as a hedge against some more volatile investments. But he hasn't, due to worries that the top has been reached for these investments. "I hate buying something that's gone up so much,'' he says.
Jones of R.E. Jones puts it more bluntly. "Energy is not a sector you invest in; it's a sector you trade.''