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A couple of days ago, I wrote about why I sold most of my energy stocks. Yesterday, the energy sector sold off and was the worst-performing sector in the markets. Even with oil up to about $110 per barrel, many energy stocks are down.
This could be a sign of stretched valuations in the energy sector. In an interview by Maria Bartiromo of CNBC, Matthew Desalvo, managing director of equity trading at Credit Suisse (NYSE:CS), said that he sees a sector rotation out of the top-performing energy sector and into sectors like financials, techs, and healthcare.
A top trader at Lind-Waldock, Rich Ilczyszyn, also believes oil could drop soon. He points out that speculators now own about as much oil as is currently held in the United States Strategic Petroleum Reserves.
Stephen Schork, editor of The Schork Report, recently said that "consumer demand destruction for petroleum products in the West and East is essentially guaranteed at this point." Schork views the high price of oil as being driven by headlines rather than actual demand, and said that implied demand for gasoline has dropped 3.7% over the last four weeks (one of the largest declines in the last 20 years).
Based on current data, it seems clear the oil market is well supplied. The risk of supply disruption from conflicts in the Middle East and Africa is overdone because almost any supply disruption (if any) with oil will be temporary. Whether a current regime or rebels are in charge of a country, region or oilfield, both want and need the cash from selling this oil.
The last factor that has an impact on oil prices is the dollar, and that has too many variables that could be both positive and negative for me to trade on in the short run.
Obviously, I completely agree with this rotation strategy, as energy stocks have reached overbought levels in many cases. Even if you like energy, as I do for the long term, I believe there will be opportunities to buy energy stocks at much better prices. Although I have been invested in oil stocks for some time, the value in this market is no longer in those names; I believe forward-thinking investors should be looking to rotate out of energy and into sectors that provide substantially more value.
With that in mind, here are some of the undervalued names in sectors like tech, financials, and healthcare which could benefit in the coming months from this sector rotation. I have highlighted stocks worth buying in the financial, tech and healthcare sectors first, followed by energy names I would sell or at least take some profits on below:
1. Hewlett Packard (NYSE:HPQ) shares are trading at $41. HPQ is a leading technology company with products ranging from computers to printers. It reported earnings that disappointed the market, and shares have dropped considerably. The Earnings estimates for HPQ are just over $5 per share in 2011 and $5.69 for 2012. HPQ pays a dividend of 32 cents per year, which is equivalent to a 0.8% yield. HPQ recently announced a goal of $7 per share in earnings by 2012.
Do you know of any energy stocks that are earning about $5 this year, and are likely to earn $7 per share in 2014, and that sell for about $41 now? I don't, and that's why I am loading up on HPQ.
2. Microsoft Corporation (NASDAQ:MSFT) shares are trading at $26.20. Earnings estimates are about $2.55 for 2011 and $2.76 for 2012. This gives MSFT shares a PE ratio of only about 10 times earnings. The dividend is 64 cents per share per year, which is a yield of about 2.5%. Microsoft has a huge amount of cash on the balance sheet -- around $40 billion. Microsoft can still innovate and has some exciting new products like the Kinect, which allows people to use their bodies to control and play games without a hand-held or other controllers.
This company has a fortress-like balance sheet, a low PE ratio, and a dividend, which makes these shares a low-risk way to invest in technology.
3. Merck (NYSE:MRK) is trading at $33.07. Earnings estimates for MRK are about $3.69 per share in 2011 and $3.85 for 2012. This puts the PE ratio at about 8. Book value is stated at $17.64. MRK pays a healthy dividend of $1.52 per share, which is equivalent to a yield of 4.7%.
I think these shares are a bargain; the PE ratio is low and the dividend is almost 5%, so I have been buying Merck shares in the recent drop. Drug stocks have historically done well in times of inflation, as they can more easily raise prices.
4. Bank of America (NYSE:BAC) shares are trading at $13.61. The 50-day moving average is about $14.09 and the 200-day moving average is about $13.37, so these shares are trading close to support levels now. Earnings estimates are about $1.33 for 2011 and $1.87 for 2012. This gives BAC shares a PE ratio of only about 10 times earnings. The dividend is 4 cents per share per year, which is a yield of about 0.3%.
BAC shares have dropped recently, due to news that the Federal Reserve denied its plan to pay a higher dividend. In time, BAC shares offer rebound potential, a dividend that is likely to grow, and a low PE ratio.
Here are some energy names I would consider selling. In many of these names, insiders are selling their shares repeatedly and in substantial amounts, which could be another sign of at least a short-term top. These oil and energy executives know these markets and valuations well, so if they are selling maybe you should also.
1. Kodiak Oil and Gas Corp. (NYSE:KOG) shares are trading at $6.70. These shares have risen from a 52-week low of $2.43. The 50-day moving average is $6.56 and the 200-day moving average is $4.78. Yahoo Finance lists the market cap for KOG to be about $1.19 billion. Compared to the market cap, revenues are minimal and insiders have been selling shares. Just days ago an officer sold 50,000 shares.
2. Samson Oil and Gas Corp. (NYSEMKT:SSN) hit a new 52-week high recently at $4.75. These shares have risen from a 52-week low of about 37 cents to nearly $5. The 50-day moving average is $3.27 and the 200-day moving average is $1.75. SSN has reported revenues of less than $6 million for the fiscal year ended June 30, 2010. Yahoo Finance puts the market cap for this company at $328 million, which is very high for a company with such low revenues. These shares are too speculative for me.
3. Royal Energy, Inc. (NASDAQ:ROYL) hit a new 52-week high recently at $7.90. These shares have risen from a 52-week low of about $1.76 to nearly $8. The 50-day moving average is $4.38 and the 200-day moving average is $2.68. See the insider selling here.
4. Blue Dolphin Energy Co. (OTCQX:BDCO) hit a new 52-week high recently at $9.09. These shares have risen from a 52-week low of about 19 cents to over $9. The 50-day moving average is $5.26 and the 200-day moving average is $2.88. For the most recent quarter, BDCO reported revenues of just over $1 million. That's just not enough to get me interested. You can see its fourth quarter report here.
5. EOG Resources, Inc. (NYSE:EOG) shares are trading at $115. EOG is an independent oil and gas company based in Texas. These shares have traded in a range between $85.42 to $121.44 in the past 52 weeks. The 50-day moving average is $108.96, and the 200-day moving average is $98.71. Since EOG shares are currently trading well over the 50- and 200-day moving averages, and close to the 52-week high, they could be due for a drop. Earnings estimates for EOG are just $3.42 per share in 2011, so the PE ratio is over 30.
6. Schlumberger (NYSE:SLB) is trading at $91.62. SLB is a leading oil equipment and service company. These shares have traded in a range between $51.67 to $95.64 in the past 52 weeks. The 50-day moving average is $89.80 and the 200-day moving average is $72.92. Since SLB shares are currently trading well over the 50- and 200-day moving averages, and close to the 52-week high, they could be due for a correction. Earnings estimates for SLB are just $3.84 per share in 2011, so the PE ratio is over 23. The book value is about $22.94. These shares appear overvalued. SLB pays a small dividend of $1 per share, which gives a yield of 1.1%. See insider selling here.
7. Cameron International (NYSE:CAM) is trading at $55.15 today. CAM is one of the leading oil equipment and service companies. These shares have traded in a range between $31.42 to $63.16 in the past 52 weeks. The 50-day moving average is $57.90 and the 200-day moving average is $46.55. Earnings estimates for CAM are just $2.76 per share in 2011, so the PE ratio is over 20. The book value is about $18.01. CAM does not pay a dividend. With a PE ratio of over 20, shares near the high end of the trading range and no dividend, I just don't see any reason to hold or buy these shares now. See the insider selling here.
8. Halliburton (NYSE:HAL) is trading at $48.23. HAL is one of the leading oil equipment and service companies. The shares have traded in a range between $21.10 to $50.74 in the past 52 weeks. The 50-day moving average is $45.99 and the 200-day moving average is $36.46. These shares are currently trading well over the 50- and 200-day moving averages, and close to the 52 week highs. Earnings estimates for HAL are at $2.88 per share in 2011, so the PE ratio is about 20. The book value is about $11.40. HAL pays a small dividend of 36 cents per share, which gives a yield of .7%. With a PE ratio of nearly 20, shares near the high end of the trading range and only a small dividend, I just don't see much value here. See the insider selling here.
9. Anadarko Petroleum (NYSE:APC) is trading at $83.34 today. APC is one of the leading oil and gas companies, and is based in Texas. The shares have traded in a range between $34.54 to $84 in the past 52 weeks. The 50-day moving average is $79.25 and the 200-day moving average is $63.48. Since the shares are currently trading well over the 50- and 200-day moving averages, and close to the 52-week high, they could be due for a correction. Earnings estimates for APC are at $2.57 per share in 2011, so the PE ratio is about 32. The book value is about $41.70. APC pays a small dividend of 36 cents per share, which gives a yield of .4%. With a PE ratio of about 32, shares near the high end of the trading range and only a small dividend, I just don't see much value left. The time to buy these shares was when they were trading for less than $40 per share; now is a great time for taking profits. See the insider selling here.
Disclosure: I am long HPQ, MRK, BAC, MSFT.
Source: Opportunities in Tech and Energy Stocks