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Yes … it’s that time of the year again – end of year stock market performance review season. And predictions for 2017.
Which market sector outperformed all others in 2016? Knowing which sector has been hot could point to where you should invest in 2017.
Investors looking for the ‘strongest performer’ for the U.S. stock market’s price action this year need look no further than stocks in the energy sector. Yes, you heard it right.
With a market-thumping +25% return, ‘Energy’ has been the top performing sector S&P sector in 2016 proving that oil is indeed alive and kicking.
The Year in Review
Oil’s 2016 journey was marked by sudden sharp sell-offs followed by swift recoveries. However, with crude’s wild ride, we saw some big winners — and big losers as well. So essentially, investors with good stock-picking skills made a lot of money, while those who bet on the wrong stocks got absolutely hammered.
By February, prices plunged all the way to a low of $26 per barrel, thanks to the boom in shale oil production and rising output from OPEC. The dramatic slide prompted several analysts to make bold calls on a potential bottom. While some suggested prices might drop as low as $20 a barrel, gloomier estimates called for a sensational $10-per-barrel floor.
But thankfully, none of these bone-chilling forecasts were correct.
A historic OPEC production cut agreement, together with help from non-OPEC producers and slashing investments (in existing and new wells) have seen oil prices more than double from their February lows to $52.
Energy Roadmap for 2017
Yes, oil had a great 2016 but what about 2017? Will history repeat itself?
While it’s hard to predict whether oil will double again and energy will outperform all other sectors next year, there’s reason to believe that 2017 could be an excellent one for oil stocks.
After a 2½ year bear market, the rig counts – both U.S. and International – have bottomed and activity is starting to bounce off slowly. Oil has rebounded from its multi-year lows reached earlier in 2016 and while the commodity may not be at a level many thought it would be at the end of the year, even at today’s price certain companies are in a position to earn profits.
Throughout the downturn, producers worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service producers.
With these efforts, many upstream companies have repositioned themselves to thrive even at lower prices. Moreover, lower capital expenditures have led to numerous project cancellations and production losses – another step in reducing the glut of crude.
The deal by members of the OPEC oil cartel to cut output is expected to bring much needed stability to the market with prices set to improve steadily. Multinational oil enterprises, on the back of greater certainty, will now be able revive spending on drilling activities.
Thus, there’s a possibility that the sector will see a replay of 2016 – with attractive upside potential and good returns.
Momentum Investing to the Rescue
As evident from the energy market story, stocks can take a sudden turn for the good (or bad), making stock picking a risky game. Every good stock also has its bad day, which further adds to the risk. At the same time, this volatility can be exploited to make significant profits, which is where the Momentum Style Score enters the picture.
The Momentum Style Score is an indication of the time to buy a stock to benefit from rising share prices. The highest score is an A, so getting in on an A and out on a B or C could be a strategy for short term gains. For a more in-depth understanding, check out our Style Score System.
But investors should bear in mind that this is a speculative strategy and not meant for the weak-of-heart.
That said, we pair the Momentum Style Score of A with a Zacks Rank of #1 (Strong Buy) or #2 (Buy), which as you know indicates stocks with high chances of outperforming the market over the next 1-3 months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
One of the main factors driving the Zacks Rank is estimate revisions, so stocks with high ranks as well as high momentum scores have even greater chances of short-term appreciation.
Here, we’ve picked out five energy stocks for momentum investors based primarily on these two factors.
Newfield Exploration Co. NFX: Sporting a Zacks Rank #1, Woodlands, TX-based Newfield Exploration is an independent energy company engaged in the exploration and production of crude oil and natural gas onshore in the U.S.
Royal Dutch Shell plc RDS.A: The Hague-based Royal Dutch Shell is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. Shell currently has a Zacks Rank #2.
InterOil Corp. IOC: InterOil – holding Zacks Rank #2 –is a U.S.-listed, independent oil and gas company with assets in Papua New Guinea.
Stone Energy Corp. SGY: Lafayette, LA-based Stone Energy is an independent oil and gas exploration and production company engaged in the acquisition and subsequent exploration, development, operation and production of oil and gas properties located primarily in the Gulf of Mexico. Stone Energy currently has a Zacks Rank #2.
Bill Barrett Corp. BBG: Headquartered in Denver, CO, Bill Barrett – with a Zacks Rank #2 – is an independent oil and gas developer in the Denver-Julesburg Basin of Colorado and the Uinta Basin of Utah
If you are looking for fresh picks that have potential to move in the right direction, definitely keep the 5 abovementioned stocks on your list as these looks well-positioned to soar in 2017.