Energy stocks finally ran out of gas Tuesday. From the vicinity of its recent record highs above $101, the Energy Select Sector SPDR ETF (NYSE: XLE) paced the market downdraft just as it has paced its recent rally, losing 2 percent by the end of the day. 

But while the selling certainly punctuated a strong first half of the year for energy equities, there are good reasons to believe this was a coma, not a period, as the industry continues to take advantage of firm commodity prices and soaring output.

Despite the stumble, the XLE, which we use as our primary benchmark here at The Energy Strategist, has still delivered a 13 percent total return in 2014 (through Tuesday, as are all the numbers below.) That’s more than double the 6.4 percent year-to-date gain including dividends for the S&P 500.

As it happens, the average portfolio holding recommended by us at any point in 2014 has also gained 13 percent while we were recommending it this year. But since that total includes 16 stock picks made after the year started, four model portfolio holdings dumped entirely in April and 10 others on which we’ve recommended taking partial profits, only half of our recommendations have spent the whole year within the portfolio. And that means we’ve significantly outperformed our benchmark on an annualized basis.

If you’ve based your buying on our list of Best Buys you’ve done much, much better than the XLE. The dozen top picks we identified on Jan. 9 have returned an average of 22.7 percent so far in 2014, including 46.6 percent for Carrizo Oil & Gas (NASDAQ: CRZO) and more than 50 percent for Targa Resources (NYSE: TRGP) and Williams (NYSE: WMB), the #2, #3 and #4 Best Buys in early January.

The updated version of the list published on March 27 added energy rally leaders like ConocoPhillips (NYSE: COP), Enterprise Products Partners (NYSE: EPD) and Energy Transfer Equity (NYSE: ETE) to the best-ideas roster. The 14 securities on that updated list are now up 23.3 percent in 2014, on average.

The tables below show that 21 portfolio recommendations, nearly 40 percent of the current total, are up at least 19 percent year-to-date. Nine have returned more than 30 percent, and six more than 45 percent so far in 2014.

The Conservative Portfolio’s 13 current income-oriented have plays outperformed to the tune of a 17.5 percent average total return so far this year, mainly because there have been no losers here to offset the 67 percent return in EQT Midstream (NYSE: EQM), the 33 percent realized in a little more than four months on ConocoPhillips or the 24 percent from Sunoco Logistics (NYSE: SXL).

As Tuesday’s call to sell half of the position in EQT Midstream indicates, we think investors’ infatuation with distribution growth may be nearing a breaking point as yields melt. At the same time, all of these holdings continue to boast strong balance sheets, robust cash flows and attractive business fundamentals. It wouldn’t surprise us at all if the Conservative Portfolio continued to outperform for the remainder of the year.


¹ Returns from Jan. 1 or from recommendation date for 2014 picks. Returns on partial sales average realized return on the sold half of the position with the current return on the remaining half.  

The Growth Portfolio rode windfalls in midstream expansion stories Targa, Williams and Energy Transfer, but also strong gains by drillers EOG Resources (NYSE: EOG) and Devon Energy (NYSE: DVN), both Best Buys, along with Whiting Petroleum (NYSE: WLL). Leading oilfield services provider Schlumberger (NYSE: SLB) and top land rig operator Helmerich & Payne (NYSE: HP) also profited handsomely from the US shale drilling boom. Solar power plant developer First Solar (NYSE: FSLR) was another big winner. We expect most of these names to continue to lead in the second half of the year.

On the other hand, top Best Buy Chicago Bridge & Iron (NYSE: CBI) became a major drag on returns of late following a short-seller attack on its accounting for the Shaw Group acquisition. (See the “Not a Nice Try for CBI” story in this issue.) Cabot Oil & Gas is another Best Buy that hasn’t acted like it recently, but we still believe it will be a long-term winner.


¹ Returns from Jan. 1 or from recommendation date for 2014 picks. Returns on partial sales average realized return on the sold half of the position with the current return on the remaining half.

The Aggressive Portfolio’s returns were marred by our premature sally into uranium mining at the end of February, just ahead of further delays in Japanese reactor restarts that sent uranium prices back to lows. But demand should strengthen significantly in the medium term given the still improving outlook for nuclear power in Japan and the ongoing reactor building spree in China, which sees nuclear power as one solution to its severe air pollution problem. Supply, meanwhile, is likely to be limited near current levels while spot prices remain so low.

The wait for uranium fundamentals to turn has been made much more bearable by the big gains notched in liquefied natural gas tanker operator GasLog (NYSE: GLOG), Eagle Ford crude driller Carrizo Oil & Gas (NASDAQ: CRZO) and oil tank car provider American Railcar Industries (NASDAQ: ARII). We remain especially bullish on Carrizo as well as the Mid-Continent crude play Jones Energy (NYSE: JONE).   

¹ Returns from Jan. 1 or from recommendation date for 2014 picks. Returns on partial sales average realized return on the sold half of the position with the current return on the remaining half.

There isn’t much to say about the four outright position sales so far this year other than that Fuel Systems was a risky bet that didn’t pan out and the others, while providing positive portfolio returns over their full holding period, didn’t match our criteria or focus.


¹ Returns from Jan. 1 to date of sale

We think we can suggest better uses of capital, and so far so good in that regard. Read on for a summary of our current portfolio strategies and an updated Best Buys list.