3 Energy Stocks To Buy

| December 20, 2019 | 0 Comments
energy stocks

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It’s time to bottom fish in this beaten-down sector

Don’t look now, but the energy sector is starting to percolate. Apparently we’ve reached the stage of the market rally where they’re coming after the dogs. But don’t hate, participate! I’ll show you how by offering three different energy stocks to buy.

Here are a few stats that illustrate just how hilariously bad energy and oil stocks have been. I’m using the Energy Sector SPDR (NYSEARCA:XLE) as the benchmark, but other popular funds for the space like Oil & Gas Explore & Prod (NYSEARCA:XOP) and Oil Services ETF (NYSEARCA:OIH) have been equally dismal.

While the S&P 500 is perched at record heights, XLE is still 40% off its 2014 peak. The XOP ETF is even worse. It’s lower than it was when Armageddon came to town in 2008.

Year-to-date, XLE is only up 2.6% while the S&P 500 is up 27%. That’s some serious relative weakness.

And here’s the stat to top them all. The entire energy sector has fallen so far that it’s worth less than a single company — Apple (NASDAQ:AAPL). If you’re a contrarian, that above all else should have alarm bells going off in your head. The fear and loathing have reached epic levels.

But here’s the thing. Many energy stocks are finally starting to catch a bid. Here are three of the best in the oil services industry worth buying.

Oil Services Stocks to Buy: Schlumberger (SLB)

SLB Chart

Click to Enlarge / Source: The thinkorswim® platform from TD Ameritrade

The easiest way to identify candidates is to look at the top holdings of OIH. Schlumberger (NYSE:SLB) tops the list, accounting for some 20% of the fund. Its weekly trend looks atrocious, but signs of a bottom have emerged this quarter. The rebound has been strong enough to reverse the 20-day and 50-day moving averages higher and SLB stock even powered above its 200-day moving average for the first time since last July.

We’re now testing overhead resistance at $40. This price has kept a lid on the stock through the back half of the year, so vaulting above it will mark a big change in character.

This quarter’s bullish behavior has me in the bottom fishing mood. SLB share’s low price tag makes them a prime candidate for naked puts.

The Trade: Sell the Jan $37.50 puts for 60 cents.

Halliburton (HAL)

HAL Chart

Click to Enlarge / Source: The thinkorswim® platform from TD Ameritrade

Halliburton (NYSE:HAL) is the second-largest holding in OIH, accounting for about 12% of the fund. One glance at its chart reveals HAL is the veritable twin of SLB. They are virtually identical. So all of the bottoming characteristics identified on SLB are shared by HAL.

So let’s skip the redundant chart comments and elaborate on why naked puts are attractive here.

The cheap price tag of SLB and HAL keep the margin requirement for short puts low enough to pump up the return on investment. By selling puts, we’re obligating ourselves to buy shares at a discount to the current price. If the puts expire worthless due to the stock remaining bullish, we pocket the premium we received upfront. But if the stock drops, we get to buy shares of a company we wanted exposure to anyways.

That’s a win-win.

The Trade: Sell the Jan $24 puts for 50 cents.

National Oilwell Varco (NOV)

NOV Chart

Click to Enlarge / Source: The thinkorswim® platform from TD Ameritrade

National Oilwell Varco (NYSE:NOV) rounds out today’s list with a similar setup as its predecessors. NOV stock’s recovery has been subtle but steady over the past few months. An ascending triangle has formed, reflecting a slight uptick in demand on each selloff. And now, NOV is knocking on the door of a major ceiling at $24.50.

A break above it will signal the completion of its eight-month bottoming process and potentially spark the next leg of its nascent uptrend.

Once again, naked puts are my play of choice if you’re willing to bottom fish here.

The Trade: Sell the Jan $23 puts for around 45 cents.

As of this writing, Tyler Craig held bullish positions in OIH. 

 

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Category: Options Trading Strategies

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