The Energy Sector: Another Solid Industry Goes "On Sale"

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

The Energy Sector: Another Solid Industry Goes "On Sale"

by David Fessler, Advisory Panelist, Investment U

Friday, August 15, 2008: Issue #839

I'm sure stock market behavior is fertile ground for psychologists who study human behavior. Wall Street talking heads have lots of nifty catch phrases to describe their moves...

We've all heard, "A rising tide lifts all boats," which could be applied to the oil and the energy sector, both flying high before the recent oil correction. All of a sudden, oil and energy stocks were the "happening" sectors, and everyone was buying them.

Frankly, it was hard to find an energy stock that wasn't going along with oil's ride. Alternative energy companies, oil service operations, even oil rig helicopter shuttle services rose, all on the thought that their products would ultimately help to produce more oil or reduce its consumption.

Good logic, to be sure, but only until something changes, either real or perceived. Of course the "change" was that people found ways to use less oil by driving fewer miles... 9.6 billion fewer in May from a year ago. Eureka. And once Wall Street processed this information, the "sell everything" mentality kicked in.

As is often the case, the market sold first and is only now contemplating whether the rout might have been a bit overdone, "Throwing out the baby with the bathwater," as it were...

The Energy Sector Is Now For Sale

Not only were oil drillers and oil service stocks hit, anything even remotely connected to the entire energy sector was sold off indiscriminately.

But it didn't stop there: Infrastructure stocks were hit, too, with the thought being that less oil being used and/or lower prices will require less infrastructure.

Don't believe it. While people are driving less, they're riding buses, trains or subways more. New York City subway ridership was up 6.5% in April over a year ago, indicating a change of habits. Similar changes are happening elsewhere in the United States.

That's more wear and tear on the infrastructure, and if even more people make the switch, more track will have to be laid, cars added, terminals built, etc.

  • Translation: Infrastructure spending will increase anyway, it will just be for different "stuff."

When markets correct, human logic and reason go out the window, the selling is overdone, and that usually results in great investment opportunities when the dust finally settles.

The reality is, regardless of what the market sentiment might be on any given day, energy use is growing, and new infrastructure is needed just about everywhere. This is particularly true in emerging economies, like that of China, India and others. And old infrastructure here in the United States is in dire need of replacement.

International Energy Agency Predictions

In spite of short-term corrections, the International Energy Agency predicts that by 2030, overall energy use will increase 55% from today's levels. And it's been estimated that $22 trillion of new infrastructure projects will be required in the same timeframe.

And while the world might be angling towards using less crude oil, overall energy use is continually rising, and will have to be made up from some other source. People still need to get around, whether it's in a car, truck, bus, train or plane. Those vehicles all require some form of energy.

Which brings me to my theory: That what we are in fact witnessing is the start of a long-term shift in energy use, and the subsequent dawn of the post-oil energy era. A true energy paradigm shift, if you will.

And while we can argue that $4-a-gallon gas is hard on the economy, it's served as a catalyst to get alternative energy sources underway in a serious fashion. Not a day goes by now without the two front-running candidates talking about their respective views on energy.

And while political hot air currently isn't a valid energy source, it's a start in the right direction.

Investors - Continue to Watch the Energy Sector

My advice is to keep one eye on the infrastructure and energy sector - companies like:

  • General Electric (NYSE: GE)
  • FPL Group (NYSE: FPL)
  • And Caterpillar (NYSE: CAT)
  • For more ideas, see Investment U Issue #838, The T. Boone Pickens Way: How to Supercharge Your Portfolio

While there's a shift underway, little else has fundamentally changed. Many of these companies' shares are selling for less that 50% of what they were only a few months ago. And that makes them outright bargains in my book.

Good investing,

David Fessler

Today's Investment U Crib Sheet:

The Energy and Infrastructure Boom & How to Play It

So what's involved in this coming energy and infrastructure boom?

  • Power plants have to be built and fueled with coal, oil, gas or uranium...
  • Transmission lines must be strung many thousands of miles...
  • Water plants and massive pipeline systems have to be constructed to distribute fresh water and collect and treat wastewater...
  • Nuclear reactors, solar panels, rock drills and other mining equipment, pumps, pipes, tanks, monitoring and pollution control equipment all must be bought and built to update our aging infrastructure. Companies specializing in energy will profit handsomely.

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