Q1 2015: Alternating Currents

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Mar 15, 2015
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Almost One Quarter Into 2015: Lots of Movement ... Without Going Anywhere

Utes and Oils have been 'interesting'

An unlucky Friday the 13th pushed the broad indices back into the red YTD. If you had simply slept soundly for the first two and a half months and just awoken, you might think it’s been a dull year.

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There has been plenty of movement, though, for traders to take advantage of.

The biggest stories of this year so far have been the continued weakness in oil-related issues and the total collapse of last year’s top industry group, the normally staid utilities.

The XLU ETF is now down about 11.5% from its late December peak and a bit further than that from where it sat in late January.

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Guru Focus readers were warned to take profits right near the top. The frothiness was evident to trained eyes in plenty of time to avoid giving back a few years’ worth of dividends.

Pull the Plug on Utility Stocks

The sell-off has been sharp, yet it merely took the group back to where it sat about five or six months ago. Statisticians in the crowd should note that the oversold condition is now so extreme that at least a near-term rebound is likely. The chart below was generated before Friday's continued almost 1% downturn in the XLU ETF.

If you didn’t sell earlier, wait for better bids before exiting. The 2+ standard deviation downturn in utilities last summer led to a sharp near-term rebound.

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It obvious why energy shares have been beaten up. Should you be buying? This industry is just as depressed as the Utes but appears to offer much more upside whenever crude prices firm again, which is sure to happen eventually.

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Stick with low/no debt firms that can weather the storm and you will probably reap some large gains. Big-cap integrated oils like Exxon Mobil (XOM) and Chevron (CVX) don’t seem nearly as exciting as some of the more beaten up energy-related shares.

I’m completely avoiding shale, and shale-related plays. Many of them will not make economic sense until oil gets back to at least $80 - $100 per barrel. Their money may run out before a move of that magnitude occurs.

I prefer companies more peripherally connected to crude pricing such as flow equipment company Cameron International (CAM, Financial). They’ve posted great long-term results and have the balance sheet to be around for the next upturn.

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Earnings are expected to decline this year but CAM’s P/E is lower than normal, even on the firm’s already reduced 2015 estimate.

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I was able to pick up some CAM shares today for under $43. The stock touched $60 and higher during each of the previous four calendar years.

A normalized valuation on CAM’s proven earnings power should lead to $60 - $80 once again over the next year or two.

Disclosure: Long CAM shares, short CAM puts