If you look at this heatmap of the S&P 500, you’ll see that sector in particular finished in the red today:
Yes, the basic materials was today’s worst performer, finishing 1.3% lower. Of the 65 basic materials companies in the S&P 500, only 11 managed to close higher, most notably Alcoa Inc. (AA), Nucor Corp. (NUE) and Tesoro Corp. (TSO). The list of laggards is much longer and includes energy heavyweights like Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Schlumberger Ltd. (SLB) and ConocoPhillips (COP).
These energy producers–and many others–sank as the price of crude oil at home and abroad fell. Brent crude (the benchmark for global crude prices) is now at a 16-month low, in part because the Euro is at its lowest level against the U.S. dollar in over a year. A stronger dollar tends to keep oil prices low, and because the European Central Bank has just cut interest rates to a record low 0.05% (compared with the 0.25% rate in the U.S), the dollar is on top.
Meanwhile, the price of West Texas Intermediate (WTI) fell on news that U.S. refiners are scaling back on operations as the summer driving season winds. According to a report from the Energy Information Administration, last week refineries operated at 93.3% of their capacity, down from 93.5% the prior week. This suggests that more refiners are going into maintenance and that demand for WTI will dip in the near-term. This, coupled with the stronger dollar, weighed on oil at home.
Does this mean that it’s time to unload energy stocks? Not entirely. When it comes to commodities stocks, you naturally want to be especially picky because they are more susceptible to swings in the dollar. But as long as you stick with B- (or better, A-) rated stocks in Portfolio Grader, you can take advantage of these swings to buy quality energy stocks at very attractive prices.
To get you started, here’s one stock that I’m recommending to a number of my readers that is trading at a great price:
Emerge Energy Services LP (EMES) is an energy services company that is focused on sand, as well as fuel processing and distribution. The company’s sand business segment provides silica sand, which is used in hydraulic fracturing in oil and gas wells. Emerge Energy Services is well-known for producing silica sand that meets strict requirements for fracturing in oil wells. And it has two facilities in Wisconsin and two facilities in Texas. Its fuel processing and distribution segment acquires, re-refines and sells transportation mixture, or commonly known as transmix. The company receives transmix from a number of common carrier pipelines, as well as from truck and private pipelines.
Now, in recent days EMES shares have pulled back after Robert W. Baird downgraded the stock from “Outperform” to “Neutral.” But I don’t agree with his assessment. What he’s missing is that in the most recent quarter, EMES turned a profit for the first time, and, in the upcoming quarter, the company is expected to post 8.5% sales growth and 40% earnings growth.
Analysts have also revised their estimates higher for the third quarter, fourth quarter, fiscal year 2014 and fiscal year 2015 in the past 30 days alone. In fact, estimates have been revised 4.7% and 16.3% higher for fiscal year 2014 and fiscal year 2015, respectively. Positive earnings revisions typically precede earnings surprises, so this bodes well for the company’s next earnings report. And I haven’t even mentioned the company’s hefty dividend, which works out to a 4.2% yield at current prices.
With the stock trading at 18 times forecasted earnings (right around the industry average), this A-rated stock is a good value for your money.