|If this summer proves similar to the past two, energy stocks could soon start pumping out good returns for investors.|
NEW YORK ( TheStreet) -- Energy has lost its mojo. No one seems to care anymore about gas prices and the threats of an Iranian nuclear program. But you ignore energy price action at your own risk -- it's delivering some of the best indications of future stock prices, and telling me it's near time to start developing some positions in energy stocks. It's been impossible to recommend any stocks confidently in the past several weeks, considering the news from Europe. But those headlines are eerily similar to those we saw from the summers of 2010 and 2011, and we should be used to them. Is the Greek debt crisis and EU negotiation any direr than in the previous two years? Probably not, and the result from those previous two summers on the equity markets has been the same: Whether the fix is temporary or not, a plan is put into place eventually to support the solvency of every member of the EU, and stock prices have found a bottom.
In energy, the pattern has been similar with one important difference: Since 2008, the lows made during each consecutive summer have been consistently higher than the previous year. In 2010, after the BP ( BP) Horizon disaster, crude bottomed at $68. Last year, in the aftermath of the Japanese earthquake, crude found a low of $78. This year I am expecting a low to be reached somewhere in the mid $80s or perhaps just south of $90. With crude oil sitting around $92 a barrel (and acting rather poorly), I am starting to look at some of the oil stocks I've avoided for weeks and trying to find some levels to begin adding shares to my portfolio. There's a lot of value in the energy space right now, and a lot of good choices depending on your tolerance for risk. Even the simplest dividend play, such as Chevron ( CVX), down to $100/share and delivering 3.7%, is a safe place to start. If you have more risk tolerance, you might try a dividend natural gas stock such as EnCana ( ECA), paying more than 4%. Even more of a shooter? You might want to look at some of the recently pummeled midcap exploration and production companies such as EOG Resources ( EOG), Noble Energy ( NBL) or even a multinational E+P such as Apache ( APA), now selling for less than 6 times future earnings. In the oil services sector, one of my favorite stocks, Baker-Hughes ( BHI) is again reaching the line in the sand I normally draw for its value level. I've had great success buying shares around and below $40, and shares of Baker-Hughes are again hovering just above this level. In offshore drilling, Rowan ( RWN) is again nearing a value $30 a share, and even big-dividend SeaDrill ( SDRL) is nearing the level where it started the year, well before the crude oil market began the stellar rally that petered out just three weeks ago. There are a lot of cheap-looking energy stocks out there, but patience will be a virtue. More downside is likely to be seen in crude oil, and therefore the final bottom in these issues is probably yet to be seen. But despite all the doom and gloom being discussed in Europe, now is a good time to begin wading slowly back into energy stocks. If this summer proves similar to the past two, you might be looking at a terrific opportunity.