Rules of the Game: Drilling Into Energy

 | May 05, 2013 | 2:00 PM EDT  | Comments
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Amid the excitement of picking stocks and trying to beat the market, many people lose sight of the prime objective of being in the market: to offset future liabilities or, in other words, expenses in retirement. Sure, plenty of people have amassed enough assets that their goal has become different. Maybe it's to leave a financial legacy for their family, or to leave a large sum to charity.

But, most of the time, the objective is pretty mundane -- again, to offset future liabilities. It's not to find the leading growth stocks, or to perfectly time trades of stocks bouncing off short-term exponential averages.

I admit that sounds kind of boring. It certainly lacks the excitement and adrenalin rush of trading. I know this. My background is as a trading coach, focusing only on growth stocks.

But, after more than a decade of zeroing in on that one small area of the market, I had an epiphany. I realized that investors with a longer time horizon were not served by the constant emphasis on trading. I also realized that fixed income, yield and international and sector allocations factored into a well-managed investment plan. In other words, it went beyond spotting the proper buy point for Green Mountain Coffee Roasters (GMCR).

(Minor digression: Green Mountain is an excellent example of a stock that many investors may have written off. It goes to show that, even after a stock has seen bad news and a steep price decline, you should pay attention to fundamentals and improving technical -- not pundits' chatter.)

So let's break down one aspect of portfolio construction. How should you allocate according to sector? At my firm Portfolio, we typically use ETFs to give clients tactical allocation to various segments of the bond and stock markets, although we also use an equity overlay portfolio consisting of a small number of hand-selected individual stocks.

This is where a focus on sector selection becomes more important. I've highlighted some of our sector holdings in recent weeks, and I will continue that today with a look at some of our energy picks.

Enterprise Products Partners (EPD) is a master limited partnership in the natural gas transport and storage business. It has market capitalization of $55 billion, and sees trading volume of 1.1 million shares per day. Analysts see earnings per share growing 6% this year and next.

Of course, with MLPs, the attraction is often the dividend. Here, the yield is 4.4%, a level that grabs some attention.

Enterprise reported strong first-quarter results this week, though the stock failed to get the technical boost that you often see after a solid report. Nonetheless, the shares are holding up nicely above key moving averages, and the fundamental case remains strong.

We also hold Occidental Petroleum (OXY), an oil-and-gas explorer and producer with operations worldwide. This stock has rallied in recent weeks, but is still trading at bargain prices, relative to earlier highs. Its price-to-earnings ratio is 16x, suggesting that there may be further upside potential here.

CEO Stephen Chazen recently said he would remain on the job until next year. He had said earlier that he was searching for a successor. The management question is always crucial for a company's ability to execute on its plans -- but, without a high-profile failure, a la J.C. Penney (JCP), a change at the top can often have little effect on a stock's price.

To be clear, I'm not recommending these stocks as buys for everyone's portfolio. Any stock purchase must match your overall financial plan, and be consistent with your goals.

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