NEW YORK (TheStreet) -- In my first post this morning I showed how tough it is to pick stocks in the basic materials sector. In this article I expand by screening through the oils-energy sector to identify stocks that are suitable investments in 2014. I narrowed my 'buy and trade' choices down to 14 stocks that are tradable, but should be underweighted in any longer-term investment allocation given the overvalued and overbought stock market. Included in my analysis are Dow components Chevron (CVX) and Exxon Mobil (XOM) which have hold ratings according to www.ValuEngine.com, are overvalued by 24.1% and 29.2% respectively and have lagged the market with gains of 12.6% and 13.9% over the last 12 months respectively.
These 14 stocks are in a sector that's 15.5% overvalued. I give the oils-energy sector an underweight rating as 29.8% of the 540 stocks in this sector have sell or strong sell ratings and only 1.5% have buy ratings.
Among the 14 stocks in today's table 13 have hold ratings with Peabody Energy (BTU)rated sell. Since the oils-energy sector has a difficult stock picking profile investors should consider using the electronically-traded fund for an underweight allocation to this sector.
SPDR Oils-Energy (XLE) ($87.10) set a new multi-year intra-day high at $88.50 on Dec. 31 vs. the all-time intra-day high at $91.37 set in May 2008. This ETF includes Dow components Chevron and Exxon Mobil. The ETF is up 19.4% over the last 12 months and is above its 200-day simple moving averages at $82.66 vs. the oils-energy sector which is up 13.3%. The daily chart below shows downside risk to the 200-day SMA given daily closes below the 21-day and 50-day SMAs converged at $86.77. The weekly chart shifts to negative on a close this week below with its five-week modified moving average at $86.75. I show a quarterly pivot at $86.54 and quarterly and annual risky levels at $88.66 and $89.37.
Courtesy of MetaStock Xenith
Today's table of oils-energy stocks shows the 14 companies selected have a mixed bag of valuations, 12 month performances with some near multi-year highs and some near multi-year lows.
The 'VE Rating' column shows that 13 stocks have '3-Engine' hold ratings and that one has a '2-Engine' sell rating.
The next column 'Last 12-month Return%' shows that the biggest losers over the last 12 months are: Peabody Energy down 33% and Diamond Offshore (DO)down 21.4%. The biggest winners are Chesapeake Energy (CHK) up 53.1%, Valero up 49.6% and Hess (HES) up 47.4% over the last 12 months.
The 'Forecast 1-Year Return%' column shows that all 14 stocks are projected to decline by 0.5% to 9.7% over the next 12 months.
The column that is headed 'P/E Ratios' represents the trailing 12 month price-to-earnings ratios and the stocks that have P/Es they are between 10.6 for Apache (APA) and 64.1 for Peabody Energy.
The '200-day SMA' column represents the 200-day simple moving averages. Peabody, Diamond Offshore, Kinder Morgan (KMP) and Transocean are below their 200-day SMAs. The others are above which reflects the risk of a reversion to the mean.
How to use Value Levels: If you are looking to buy stocks or add to long positions, my buy-and-trade methodology recommends that you employ good-until-cancelled GTC limit orders to buy weakness to a value level shown in the table. The value levels followed by an 'M' apply for January only. Those followed by a 'Q' apply until the end of March. Those followed by an 'S' apply until the end of June. Those followed by an 'A' apply for all of 2014.
How to use Pivots: A pivot will likely be a magnet during the time frame shown by the letter. Pivots followed by an 'M' apply for January only. Those followed by a 'Q' apply until the end of March. Those followed by an 'S' apply until the end of June. Those followed by an 'A' apply for all of 2014. If a value level or risky level is violated during its time horizon that level becomes a pivot and has an 85% chance of being re-tested during its time horizon.
How to use Risky Level: If you are looking to book profits on stocks, my buy-and-trade methodology recommends that you employ GTC limit orders to sell strength to a risky level shown in the table. The risky levels followed by an 'M' apply for January only. Those followed by a 'Q' apply until the end of March. Those followed by an 'S' apply until the end of June. Those followed by an 'A' apply for all of 2014.
At the time of publication the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.