Savvy investors are reaping rewards from the oil boom by moving into energy stocks, or beefing up existing allocations. But timing is everything.
Investors should overweight or market-weight the energy sector, advised Arild Holm, equity analyst who follows energy stocks at Principal Global Investors, Des Moines, Iowa. "It's not the time to be underweight," he said.
Within the sector, he considers the most attractive stocks to be those of independent producers, which benefit first from rising prices, followed by stocks of oil services and drilling companies, "because they're the companies the producers hire to drill the wells and determine if they've found oil or gas."
Analysts who monitor energy companies expect prices to continue to zigzag at least through the end of 2004 because demand is so tight.
William F. Quinn, president of AMR Investment Services Inc., Fort Worth, Texas, which manages the $13 billion American Airlines Inc. pension plans, said: "As value investors, we've been overweighting energy stocks for a couple of years when they were cheap. Now that the prices are up, we've been paring back."
David Spika, investment strategist at Westwood Management Corp., Dallas, said the firm's large-cap value and "smid"-cap value portfolios have outperformed their peer group so far this year because the managers had the foresight to focus on energy holdings.
He expects oil prices to average $37 a barrel for the rest of the year, higher than the $32 consensus estimate. "Our strategy of overweighting will continue work at these prices," he said.