13 Potential Energy-Stock Sell Candidates

Most of my contributions to the All-Stars blog have been looking for buys, but then again, we have been in a bull market since I began contributing here. While I remain long-term bullish, I have recently become concerned that the energy sector is overextended, especially the smaller and medium-sized companies. While the momentum has begun its reverse, I believe that there could be a sharp pullback in coming weeks, especially among stocks that are trading at stretched valuations.

While the long-term outlook for energy do seem positive, with new technologies enabling better recovery and aiding in finding new supplies, investors have piled into the stocks. For the year, energy stocks in the S&P 500 are up an aggregate of 16.5%, which is twice as much as the overall market. In the S&P 600 Small-Cap, the performance is even stronger at + 21.2%.  Of course, a lot of the interest is driven by the surge in oil, which as increased over 20% since the end of the year. 

There’s not a direct correlation, though, between the underlying price of the commodity and the stocks of those companies that either own reserves or provide goods and services associated with the production of them. Between labor constraints, other production constraints, rising material costs, the potential for taxation (like in the North Sea recently) and many other profit inhibitors, earnings growth may not keep up with these investors' expectations.

I decided to screen for stocks in the sector (in the Russell 3000) that look extended and expensive.  Here is what I did:

 
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One of the technical indicators I employ to gauge how extended a stock trend might be is to consider the positioning of certain moving averages. I have observed that stocks typically see some consolidation of uptrends within 13 weeks, though often they can persist without seeing the 10dma cross the 50dma for longer periods of time. As I review the complete list (except for BRNC, which is being acquired for cash), most look extended, but I should point out the ones that aren’t: Union Drilling (UDRL), Helix Energy (HLX), Parker Drilling (PKD), ION Geophysical (IO), Dawson Geophysical (DWSN) and FX Energy (FXEN).  

As I stated, I am cautious on the energy sector, especially smaller names. Note that none of the large integrated companies made this list, as they are too inexpensive n my view. Among the smaller companies, though, there has been a tremendous buying, and I believe that we could see some corrections within the sector. The screen I shared is designed to identify companies that may be at risk. I encourage you to review your holdings if you are heavily invested in the sector and look forward to hearing your observations.

Regards,

Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  Alan Brochstein holds no positions in the securities mentioned in this post. 

Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs. 

Alan Brochstein maintains a business relationship with TradeKing.