Why Energy Is Once Again Catching The Market's Eye

Over the last month the energy sector has outperformed the market, and as you can see in the chart below, has done so by 6.5 percent. Year-to-date the sector is beating the S&P 500 Index by over 3 percent.

In a spectacularly performing market during 2013, energy lacked some of the incredible performance seen throughout the other sectors, but recently it has turned up, catching the attention of the market yet again.

In looking at an overview of market performance, it’s important to recognize what caused the moves. For example, one reason the energy sector is climbing back up, could be due to the broader market rotation that we’ve noticed recently, from growth stocks to value stocks.

Growth stocks are generally successful companies that are expected to continue growing their earnings, usually at a rate that outpaces the market, causing investors to pay more for them. Value stocks rarely outpace the market as much as growth stocks do. Investors see potential in buying these cheaper names, ones that trade at lower price-to-earnings (P/E) ratios than the S&P average, because they still have the potential to significantly outperform over time.

As I mentioned, in the past few weeks high-growth names have pulled back, while value names are steadily gaining momentum. One of the main reasons for this rotation is that some investors view the valuations of growth names as too high, especially in comparison to the value companies.

What’s significant is that many of these value names happen to be in the energy sector. We’ve taken advantage of this shift to value in our Global Resources Fund through names like Pacific Rubiales Energy (PEGFF.PK) and Valero Energy Corporation (NYSE:VLO).

Although this rotation is important to the recent moves in energy, it is not the only factor driving the sector up. Take a look at the price of Crude Oil and Natural Gas.

Currently, natural gas prices are starting to stabilize while the price of West Texas Intermediate (WTI) crude oil is up by 4 percent year-to-date, reaching $104 a barrel just last week. This price increase in WTI is linked to concerns over future supply, but nevertheless higher oil prices bode well for stocks within the energy sector.

According to the Energy Information Administration (EIA), short-term projections for the price of WTI remain relatively high. Additionally, the group commented that:

Aside from seasonal issues, the EIA expects strong crude oil production growth, primarily concentrated in the Bakken, Eagle Ford, and Permian regions, continuing through 2015. Forecast production increases from an estimated 7.4 million barrels per day in 2013 to 8.4 million barrels per day in 2014 and 9.1 million barrels per day in 2015.

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This projection is good for North American producers and service companies.

So how can you gain entry into this energy opportunity?

I continue to stay focused on companies that show robust fundamentals and are located in sectors showing strength. Currently, we are capturing the latest takeoff in the energy sector through our exposure to companies that are reasonably valued. In addition to the two I mentioned previously, if you look at the fund's top 10 holdings you will also see our investments in large-cap names like Schlumberger NV (NYSE:SLB), EOG Resources Inc (NYSE:EOG) and Halliburton Company (NYSE:HAL).

Are you ready to energize your portfolio?

Disclosure: Past performance does not guarantee future results. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Global Resources as a percentage of net assets as of 03/31/14: EOG Resources 2.37%, Halliburton Co 1.87%, Pacific Rubiales Energy Corp  0.25%, Schlumberger Ltd 3.46%, Valero Energy Corp 0.29%.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The S&P 500 Energy Index is a capitalization-weighted index that tracks the companies in the energy sector as a subset of the S&P 500.

Written By: Frank Holmes