The energy sector is underperforming the broader averages today and has seen profit taking over the last few weeks, off 6% from its June 23 highs.
Because of the strengthening dollar and weak European economic growth, in the near term expect that energy will continue to be challenging. The partial offset is that the U.S. economy is in better shape and will likely put up 3%-3.5% GDP growth in the back half of 2014.
In Action Alerts PLUS, until the dollar stabilizes we want to be pickier in our energy bets. This is the reason we closed out our Occidental (OXY) position on Friday and why we recently cut Marathon (MRO). Both names have terrific long-term stories, but we felt it was necessary to take our gains because we see more downside in the short term.
Remember, energy was the No. 1 sector in terms of performance in the second quarter (the Energy Select Sector SPDR (XLE) rose 12.4% in the second quarter vs. the S&P 500, which was up 4.7%). So we wouldn't be surprised to see further underperformance in the near term. Should either Occidental, Marathon and/or our other positions pull back, we would consider buying them back or adding to them.
In the meantime, we'll hold onto special situation stories, including Royal Dutch (RDS.A) because of its impressive new leadership and profitability focus, Kinder Morgan (KMI) for its new C-Corp/simplified structure, Boardwalk Pipeline (BWP) as primarily a U.S. shale/pipeline growth story and Ensco (ESV) for its yield and valuation. All of these companies are committed to their dividends and have strong enough balance sheets to support and grow them over time. We'll remain selective on buying them but will choose the yield levels when we take action. We are currently underweight the group.
