There's Momentum in Oil Stocks if You Know Where To Look
Momentum traders look to take advantage of trends in a stock's price in the belief that these stocks will continue heading in the same direction - leading to timely and profitable trades.
Large professional traders and money managers often must enter positions over a period of time rather than all at once due to the sheer size of their investments. Once these managers recognize that conditions favor a given company and are contributing to a positive earnings outlook, the managers buy their intended position in smaller chunks, driving the price steadily higher. This price momentum has a tendency to feed on itself, attracting more new buyers.
The momentum-effect is especially strong among Zacks Rank #1 and #2 stocks because as earnings estimate revisions rise, prices race to keep up and anticipate future estimate revisions, resulting in even bigger gains.
It’s important to note that “Momentum” as we describe it here, doesn’t mean simply price momentum – although that is the major component – but also includes momentum in earnings and earnings estimate revisions - which are major factors that drive the price of a stock, even if the share price hasn’t started to move higher yet.
Here are two stocks that currently have a lot of momentum because they are the beneficiaries of current supply and demand forces in the oil markets, both in the U.S. and abroad.
Global Oil Supplies
Oil prices are rising of late because of issues across the globe. Sanctions on Iran, port closures in Libya, a strike in Norway and a political catastrophe in Venezuela are all constraining supplies. OPEC and Russia are unlikely to be able to fill the gap, portending continued high prices. North American production is on the rise due to investments in improved technologies, but it will take years to catch up to what’s likely to be needed worldwide.
In the Permian basin in the southwest U.S., drillers are having great success extracting oil from previously difficult spots, but pipeline and transportation bottlenecks make it difficult to transport the raw crude to refineries to be turned into finished fuel products.
Although we often speak about oil as if it is a single commodity, trading at a single price, in fact significant quality and geographical differences exist. For instance, Brent North Sea crude is actually of inferior quality to West Texas Intermediate (because of its higher sulfur content) yet it tends to trade at a 5-10% price premium because the costs of transporting it to world markets is considerably less than getting the oil out of Cushing, Oklahoma.
Delek US Holdings DK operates four refineries in Arkansas, Louisiana and Texas, and happens to be in a unique position to capitalize on the transportation inefficiencies in the Permian basin. Because of its geographical locations, this company can purchase high quality raw crude from areas that are forced to sell for lower prices because of the difficulty of transportation. The finished products Delek produces – primarily gasoline – sell for the same price regardless of location, so Delek US has a lower cost of input than most of its competitors.
As you can see, Delek U.S. has handily outperformed the Oil Refining Sector over the past year and despite a recent pullback, exhibits strong price momentum, but the real driving force here is earnings estimate momentum. The next three estimates are for 550%, 211% and 329% increases over the previous periods. This is the kind of performance that earns you a Zacks Rank #1 (Strong Buy) and a Momentum Style Score of “A”
B.P. Plc BP is one of the true global giants in the exploration and production of petroleum products. Operating on six continents, BP is involved in every aspect of the business, including drilling, refining, marketing, transportation, and the manufacture of petrochemicals. With an eye on the future, they are also heavily invested in natural gas and solar power generation technologies and figure to be a leader in the long term global transition to lower carbon energy sources.
In terms of the metrics we value at Zacks, BP has a nearly perfect report card. Not only is it a Zacks Rank #1 (Strong Buy), but with a very reasonable forward P/E ratio of 14X, it earns a value style score of “B”, plus growth and momentum scores of “A” and an overall VGM of “A”. Our current Consensus Earnings Estimate for 2018 is $3.34/share, up from $2.79/share just 90 days ago and a whopping 78% improvement over 2017.
BP p.l.c. Price and Consensus
BP p.l.c. Price and Consensus | BP p.l.c. Quote
It’s recently been a difficult time for investors to act with certainty in the markets because the headlines simply haven’t been inspiring confidence. As the markets grind back and forth in a range based on whether that day’s news was positive or negative, it’s confusing to know what to buy, hold, or sell. Smart investors need to keep their heads down, examine which firms are actually set up to gain from national and international events (and they’re out there!) and then act decisively.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
See Zacks' 3 Best Stocks to Play This Trend >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Delek US Holdings, Inc. (DK) : Free Stock Analysis Report
BP p.l.c. (BP) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
