Top-Performing Energy Stocks Picked by Funds

NEW YORK (TheStreet) -- Mutual funds that buy shares of energy companies returned 10% in the first quarter, almost double that of the second-best sector, and that performance shows no sign of slowing.

Political upheaval in the Middle East and worldwide concern that nuclear energy may not be safe are fueling a spike in the shares of natural gas, oil and coal companies, which account for most of mutual funds' energy holdings. Growing global economies, meanwhile, are pushing up demand for energy after two limp years.

Professional investors are loading up on National Oilwell Varco ( NOV), which has risen 20% this year, Marathon Oil ( MRO), up 38%, and Devon Energy ( DVN), up 19%. By comparison, the S&P 500 Index has climbed 4.6%, and the average gain for the 16,686 mutual funds tracked by Morningstar is 3%.

The top 10 performing U.S. mutual fund sectors and their returns this year through March 24, according to Morningstar, are: energy, 10.4%; small growth, 5.8%; natural resources, 5.7%; mid-cap blend, 5.6%; mid-cap growth, 5.3%; industrials, 5.2%; mid-cap value, 5%; health, 4.8%; small blend, 4.8%; and large value, 4.8%. "Blend" refers to funds that hold both growth and value stocks.

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Indicative of energy funds' dominance, at least 30 of the 40 best-performing funds are oozing oil-industry stocks.

Two highly leveraged ProFunds mutual funds, the UltraSector Oil & Gas Investor ( ENPIX) and Oil Equipment Services & Distribution Investor ( OEPIX), lead the fund-returns parade, each up about 21% this year.

"Energy stocks are basically being driven by the price of oil," said Peter Tuz, president of Chase Investment Counsel and co-manager of the Chase Growth Fund ( CHASX) and Chase Mid-Cap Growth Fund ( CHAMX), in an interview. "It was at $80 (a barrel) at year-end and it's over $100 today, driven by the turmoil in the Middle East since mid-January."

"This could continue for years," Tuz said of the energy sector's price volatility, "but even if it subsides, oil prices may continue to rise due to growing demand from developing countries, particularly China, at a time when existing supplies are low."

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Oil's record price is $147 a barrel reached in July 2008, though that was driven, in part, by hedge fund investors speculating on commodities.

Standard & Poor's analysts said in a March 23 research note that refiners will reap increasing profits because they can pass higher prices they pay for crude on to consumers. When oil prices last peaked, refiners' operating-profit margins approached $17 per barrel, while it's estimated their margin was $12 per barrel early this year, the analysts said.

Todd Rosenbluth, a mutual fund analyst for Standard & Poor's, said in an interview Wednesday that his firm expects energy stocks will continue to outperform the S&P 500 Index, particularly large integrated oil and natural gas companies that control every part of the business from exploration and production, and on to distribution. They include Exxon Mobil ( XOM), Chevron ( CVX) and PetroChina ( PTR). S&P has "strong buy" ratings on all three companies.

Here are six mutual funds that produced top performances in the first quarter and their best-performing stocks:

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The third-best performing fund this year, with a 16.5% return through March 22, and a scorching 67% return over the past 12 months -- which makes it the top performer out of all funds in that period -- is the $225 million Integrity Williston Basin/Mid-America Stock Fund ( ICPAX).

The fund, which earned a five-star rating from Morningstar, is a niche play, as it focuses on companies active in developing the oil shale and oil sands deposits in a swath of land that runs from the upper Midwest, through North Dakota and into southern Canada. The Williston Basin is one of the largest sedimentary oil shale basins in North America at nearly 300,000 square miles.

Integrity Williston Basin/Mid-America also gets a strong four-star rating from Standard & Poor's. Todd Rosenbluth, the ratings firm's mutual fund analyst, said the fund has an excellent long-term performance record, but added that it's worth noting that the three current managers, who work for Integrity Funds, have only been on the job since February 2010.

"New management could mean changes to style or strategy and could also make past performance less relevant" in measuring future performance, he cautioned.

The fund's top stock pick is National Oilwell Varco ( NOV), at 4.3% of the portfolio. The company is one of the largest equipment suppliers in the drilling industry and has essentially cornered the market for offshore oil rigs. It provides a comprehensive line of equipment for rigs and the products used in oil and gas production. It also provides distribution services, which include maintenance, spare parts and repair services for its equipment.

National Oilwell Varco's shares are up 20% this year through March 22 while its industry sector, oil and gas equipment and services, is up 17%, according to Morningstar.

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The biggest fund in the energy sector and a bellwether for its performance is the $15 billion Vanguard Energy Fund ( VGENX). It is up 12.8% this year through March 23 and 29% over the past year.

The fund holds 118 stocks and has a low 27% annual turnover. Expenses are a very low 0.38%.

Morningstar analysts make the fund the top pick in its sector, and give it the firm's highest rating of five stars.

Standard & Poor's gives it a "strong buy" recommendation and the company a five-star rating, its highest.

Vanguard Energy favors the industry's largest integrated oil companies, including: Exxon Mobil ( XOM), at 7.6% of the fund; Occidental Petroleum ( OXY), 5%; and Chevron ( CVX), 4.4%.

Morningstar fund analyst Rob Wherry said in a Feb. 29 research note that "this fund is run by experienced managers who like cheaply priced stocks with decent growth prospects. The category can be volatile, so they minimize risk by tilting the fund toward large-cap, integrated oil firms that aren't as susceptible to commodity price swings as are smaller players. The portfolio has 90% of assets in large caps compared with 63% for the category average."

Exxon Mobil, one of the world's largest companies with a market value of $411 billion, is up 14% this year and 26% over the past 12 months, through March 23.

S&P has a 12-month price target of $99 on its shares, a 20% premium to the current price. S&P oil industry analyst Michael Kay said in a research note on the firm that the company will continue to benefit from its many "big-pocket" oil properties it taps with offshore rigs, as wells as its liquid natural gas (LNG) oil shale projects and its joint ventures with state-owned companies.

Morningstar analyst Allen Good said in a Feb. 12 research note that in addition to its huge inventory of developable properties, the company is well-managed and its "superior capital allocation and operational performance should drive high returns on capital."

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Cambiar Aggressive Value Investor Fund ( CAMAX) is the fourth-best performing mutual fund this year, with a 15.9% return through March 22. It is up 75% over the past year.

It differentiates itself from the other top-performing funds this year by being one of the few with a portfolio that includes some stocks other than energy in its 10 largest holdings.

The fund also carries a five-star rating from Morningstar, which underscores the quality of its management.

The $285 million fund's top holdings include U.S. Steel ( X), a new position and second-largest in the portfolio at 6% (it's shares are down 7% this year); contract electronics manufacturer Flextronics International ( FLEX), down 6.6% this year; and aircraft and railroad car builder Bombardier Subordinate Voting Shares ( BBD.B), up 29%.

Archer-Daniels Midland ( ADM) is the fourth-largest stock in the fund, at 5.4%, and its 21% return this year has given Cambiar Aggressive Value a big boost.

The company is one of the world's largest processors of agricultural commodities, including oilseed, corn, cocoa and wheat. It is also a leading manufacturer of vegetable oil and corn sweeteners, flour and animal feed, as well as ethanol, used as a supplement in gas.

ADM has benefited from skyrocketing commodities prices, which is being fed by tight global supplies. In February, the company reported that its fiscal second-quarter earnings rose 29%, slightly slower than revenue.

Standard & Poor's has a "hold" recommendation on its shares and gives it a three-star rating out of a possible five.

Analysts that follow the company give it five "buy" ratings, five "buy/holds" and three "holds," according to S&P. For fiscal 2011, those same analysts estimate that ADM will earn $3.34 per share and that will grow 4% to $3.48 in 2012.

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The $3 billion Fidelity Select Energy Fund ( FSENX) has a portfolio that includes most of the top performers in the sector, giving it a return of 14.6% this year.

Exxon Mobil ( XOM), Schlumberger ( SLB), Occidental Petroleum ( OXY) and Chevron ( CVX) are among the five biggest holdings.

The fourth-largest holding, at 4.8% of assets, is propelling the fund. That's from Marathon Oil ( MRO), which is up 38% this year and 65% over the past 12 months, giving it a market value of $36 billion.

Marathon is an integrated energy company with exploration and production activities in the U.S., Angola, Indonesia and Norway. It operates six refineries in the U.S., has a big oil sands mining operation in Canada, and a liquefied natural gas facility in Africa.

Standard & Poor's has a "hold" rating on its shares, because its current share price of $50.81 exceeds the firm's price target of $49.

Marathon is in the process of reinventing itself, as it plans to split off its downstream business into a new publicly traded entity, Marathon Petroleum, which will be spun off to current shareholders in a tax-free transaction effective June 30.

Analysts give Marathon Oil six "buy" ratings, seven "buy/holds," eight "holds" and one "weak/hold," according to a Standard & Poor's summary. Those same analysts' estimate is for earnings of $5.28 per share in 2011, and growth of 8% to $5.71 per share in 2012.

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One of Standard & Poor's favorite funds in the natural resources sector, which overlaps the energy sector, is the Franklin Natural Resources Fund ( FRNRX). The ratings firm gives it five stars, its highest.

The fund was up 8.7% this year, through March 23, while the average for natural resources funds was a return of 5.8%.

S&P mutual fund analyst Todd Rosenbluth said the fund has outperformed its peers over the past year, three years and five years, and has kept the same management team throughout -- a big plus.

It also has a much lower management fee, at 1.05%, than the average of 1.6% for other funds in its sector.

The fund's top 25 holdings are all energy stocks. One of its top performers this year is Devon Energy ( DVN), at 3.3% of the portfolio, and sporting a 19% return this year. It has a market value of $40 billion.

Devon is one of the largest independent exploration and production companies in North America. It owns conventional oil and natural gas properties as well as oil shale and oils sands projects. In 2010, the company sold over $10 billion in assets, mainly in the Gulf of Mexico, Brazil and Azerbaijan, turning the company into a pure-play, onshore North American company.

S&P has a "buy" recommendation on its shares and gives the company a four-star rating out of a possible five. It has a $100 price target on its shares, which are currently trading at $92.87.

Analysts' opinions include nine "buy" ratings, 11 "buy/holds," and 10 "holds," according to S&P. Those analysts' estimates show that Devon will earn $6.14 per share in 2001, rising 24% to $7.60 per share in 2012.

Earning a surprise top 30 ranking with a return of 13% this year is the $250 million New Alternatives Fund ( NALFX), which keeps a socially responsible stock portfolio, including lots of "green" picks.

Its long-term record isn't good -- it has a negative 2% return over the past three years -- but this fund's prospects are likely to improve as investors' interest shifts to safe energy resources after the nuclear-plant failures in Japan has the world weighing the benefits of nuclear power.

The fund's top stock pick, at 6% of the portfolio, is EDF Energies Nouvelles ( EEN), a French renewable-energy company that is a developer of wind and solar-energy projects. The company is half-owned by the French electric utility Electricite de France ( EDF).

It's involved in an area of electricity generation that is going to get a new look from both governments and investors in the coming months. The alternative-energy sector has been heavily dependent on government tax breaks or subsidies for its growth.

About 90% of EDF's generation capacity comes from wind power, although its solar capacity is expected to grow much faster than it has previously and make up a larger portion of its overall capacity. It also has interests in ocean power and bio-fuels.

The majority of the company's power generation is based in the U.S., France, Italy and Portugal for projects it owns and those it manages for third parties.

Company shares have a return of 11% this year, giving it a market value of $2.7 billion.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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