Rules of the Game: 2 Big Energy Plays

 | Feb 11, 2013 | 2:30 PM EST  | Comments
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The energy sector tends to spook many investors (aka traders), who follow pundits' views on the sector outlook or the latest news development from Washington, Wall Street, Riyadh or Caracas.

I've always been sector agnostic. I've never been an analyst focusing on just one area of the market. I'm in favor of constructing portfolios tactically, using the asset classes and sectors that bring the most value at any given time.

But it doesn't mean obsessively tracking technical indicators to trade in and out. Yes, I did that for years and that's exactly how I learned the futility of such methods. That said, I still rely on moving averages to gauge medium- and long-term support for a stock.

When it comes to energy-sector names, a few stocks in the large-cap growth category caught my eye. These are holding up nicely, relative to medium-term moving averages, and may be worth a look for investors who like a portfolio of individual stocks.

So far in 2012, the S&P energy sector is leading with a gain of 8.69%. Most of those gains came in January. The SPDR Energy ETF (XLE) advanced 8.3% last month and is up 1.6% so far in February.

Two S&P 500 energy-sector names that have shown strong growth are Cameron International (CAM) and Marathon Petroleum (MPC).

The traditional concern with high-growth stocks is that they are overextended and due for a correction. That may be true in the near term, but it doesn't mean a stock should be written off entirely.

Cameron, a Houston-based maker of gear for the oil-and-gas industry, closed Friday at $65.41, 12.8% above its 50-day line and 25.4% above its 200-day. Yes, that tends to scare off a lot of traders. But let's look at the longer-term potential here. Analysts see earnings growing 24% this year to $3.89 per share and another 29% next year to $5.03 per share.

A key reason analysts are optimistic about this stock is that Cameron has a niche in upgrading older rigs.

Despite having a market cap north of $16 billion and a trading volume of 2.27 million shares per day, Cameron is a volatile stock with a beta of 1.69.

Volatility is a bigger issue for traders than investors, but even investors with a longer-time horizon get spooked by sharp downdrafts in a stock. But those who panic and sell often regret it. That's because a stock with good fundamental prospects often rebounds soon after a pullback.

Marathon Petroleum has been on a rocket ride lately. The stock closed Friday at $81.43, for a month-to-date gain of 9.7%. That follows January's gain of 17.8%. February is Marathon's ninth month in a row of advances.

Is a pullback in the cards after that kind of rally? Sure, the stock will have a down month at some point, probably sooner rather than later.

Marathon, an Ohio-based refiner and pipeline operator, is benefiting from exposure to the U.S. crude market, although analysts see an earnings decline next year to $9.49 per share. That would be down 6% from this year's expected $10.07 per share.

Marathon is a bit frothy, having rallied to a new high on Friday. The company was spun off from Marathon Oil (MRO) in 2011, so it is still in the throes of its early growth. That means explosive price moves, such as the stock has made recently, are not all that unusual.

For long-term investors with a bit of patience, this is a case where the 50-day moving average, or even the 200-day, could offer a possible entry opportunity. But for those with a true long-term perspective, the idea that a stock is too extended has been somewhat overblown. In other words, those who are able to sit through pullbacks in a stock are often rewarded over time, even when they purchase as a stock is considered overbought.

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