3 Booming Energy Stocks For The Rest Of 2018

David Goodboy's picture

Wednesday, July 25, 2018 - 2:30pm

by David Goodboy

This year will likely go down in history as the year energy stocks broke out. Fueled by an upside explosion in oil prices, many energy stocks have pushed higher this year. It is not too late to grab a piece of the bullish action! In fact, right now is an ideal time to buy.


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The recent pullback as reflected in the United States Oil Fund ETF (NYSE: USO) and the Energy Select Sector SPDR Fund ETF (NYSE: XLE) has set up an ideal buying opportunity in particular stocks.

Let's take a closer look at why energy stocks are moving higher.

First, energy stocks are tightly correlated with interest rates. As interest rates climb so do energy stocks. In fact, history shows that the energy sector has outperformed all 16 industries during rate increase regimes.

We can expect interest rates to continue to climb. Greg McBride of Bankrate said:

"The Fed pledges to maintain their gradual pace of rate hikes despite inflation moving close to their 2 percent objective with some wiggle room for it to run slightly above. The movement in inflation will squarely shift the outlook to four rate hikes, rather than just three, by the time 2018 draws to a close. With inflation now on the cusp of that threshold, the Fed may become more proactive about raising rates in an effort to keep inflation contained. If anything, the pace of increases is likely to pick up rather than back off."

Secondly, geopolitical tensions are pushing energy prices higher. Iran is currently the leading upside pressure point. The State Department ordered that all purchases of Iranian oil must end by November. This extreme sanction on the world's third largest oil exporter has resulted in energy prices spiking.

Finally, pressure on OPEC will likely result in energy costs increasing as long as Trump holds office. Trump has a goal of domesticating energy supply by pressuring OPEC. The latest iteration of the anti-OPEC moves is a Congressional bill that will allow the United States to sue OPEC for price fixing under the Sherman Anti-Trust Act. This may be disastrous for U.S.-OPEC relations, resulting in an extreme upside energy price move.

Now that we understand what is making prices climb, here are three energy stocks for the rest of 2018.

1. United States Oil Fund ETF (NYSE: USO)
I like ETFs in the energy space. ETFs provide diversification across a given sector while delivering direct exposure.

The United States Oil Fund is trading higher by nearly 50% over the last 52 weeks and is higher by 17% this year alone.

The ETF is based on the performance of the spot price of West Texas Intermediate light, sweet crude oil, which is delivered to the major trading hub in Cushing, Oklahoma from all points in the United States.

USO is perhaps the most direct way stock traders can gain exposure to the volatile oil futures market. It enables those with just a stock trading account to profit from movement in oil futures.

Right now is an ideal time to get long in USO as the price has pulled back to the 50-day simple moving average. Buy on a break out of $14.50 per share with a target price of $25.00 per share and initial stops suggested at $12.47 per share.

2. Carrizo Oil & Gas (Nasdaq: CRZO)
Shares of this Houston based energy company have soared over 90% higher over the last 52 weeks, and it is trading higher by nearly 34% in 2018.

CRZO posted solid first quarter results with second-quarter numbers hitting the wire on Aug. 7. Rather than bore you with the minutiae about the company, here is an actionable investing idea.

I don't like buying stocks pre-earnings. Although I expect the second quarter to meet or beat expectations, the smart move is to set a buy order to catch the surge higher, if it happens. Price has been building a base in the $27.00 per share zone since mid-June. $31.00 is the suggested level to set a buy order pre-earnings. If filled, initial stops make sense at $25.43 per share, and my target price is $40.00 per share.

3. Penn Virginia Corporation (Nasdaq: PVAC)
PVAC is an independent oil and gas firm focused on the onshore exploration, development, and production of oil, natural gas liquids (NGLs), and natural gas. What makes me most bullish is the fact the company's earnings per share (EPS) continue to be revised higher for FY1 and FY2.  Also, the current price earnings ratio FY1 marks at just over 9. When compared to the industry average number of nearly 17, one can see just how much of a bargain the shares are.

These metrics have resulted in the shares soaring over 128% in 2018. Over the last several weeks, the stock has pulled back to the $85.00 per share zone and has just started moving higher again. The ideal buy opportunity has set up at $88.00 per share. My target price is $115.00 per share, and initial stops are suggested at $78.92 per share.

Risks To Consider: The ever-changing geopolitical situation is the true wildcard with energy stocks. Trump's incendiary rhetoric only serves to add volatility to an already volatile situation. Anything can and does happen in the energy market. Be sure to position size properly and be ready for craziness when investing in energy!

Action To Take: Consider investing in one or more of the stocks listed above.

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David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.