My value-seeking hunger is fixated on energy stocks these days -- but the sector has mostly been a value trap so far, and I suspect many stocks will ultimately prove disappointing. After all, the industry attracted lots of new entrants (many of them lesser quality) back when prices and profits were high.
It's important for energy investors to remember that when dealing with a commodity business like oil, marginal production cost is key. Companies with the lowest production costs survive, while others don't -- and over time, the unprofitable players' exit helps move prices back up, enhancing the more-efficient companies' profits.
But how do you find the best energy picks among the sea of thousands? I believe that the easiest way is to look at well-regarded investors' picks.
Consider Baupost Group. Led by investor Seth Klarman, Baupost is one of best investment funds out there, although it tries to remain out of the public eye as much as possible. The firm quietly analyzes, invests and (most of the time) reaps attractive gains.
Well, Baupost's most recent 13F filing shows that as of March 31, its energy holdings included Alon USA Partners (ALDW), Kosmos Energy (KOS) and a sizable stake in Pioneer Natural Resources (PXD). Baupost's biggest holding today is liquid-natural-gas exporter Cheniere Energy (LNG).
Another firm to look at is Longleaf Funds, one of better mutual-fund families. Founded by Mason Hawkins, Longleaf has delivered solid returns for investors over the past 40 years. Its current energy stakes include Murphy Oil (MUR) and Consol (CNX).
Stock pickers like Klarman and Hawkins are very patient investors who are willing to buy during moments of maximum pessimism, then wait for an extended time until things turn around. If you can do the same, energy stocks could be a good sector for you.
