Playing Energy

Congress's instinct to pander to the electorate's lowest common denominator has never been more evident. This slapdash proposed gas-price legislation seems meant to paper over decades of failure to address the real energy issues facing America. Coming on the heels of scuttling the Dubai ports deal and the more recent immigration fiasco, it's no wonder Congress has sunk to a low level of public esteem, and deservedly so.

But this is an investment column, not a political screed. Now that I've gotten that off my chest, let's look at the investment implications of the latest surge in oil and gas prices.

The silver lining to high gasoline and oil prices is that they encourage the quest for alternative energy sources, as well as more aggressive drilling and exploration in order to boost production, not to mention conservation. In other words, the market itself is likely to promote the kinds of sensible policies that Congress has been too timid to address. Perhaps Congress could simply embrace these incentives while narrowly crafting a program to ease the burden on those most vulnerable to high prices at the pump.

Eventually demand should ease and production increase, which is the only long-term solution to high oil prices. Needless to say, this would knock energy stocks from the lofty perches they've recently been occupying.

But while we're waiting, there are some obvious beneficiaries: oil exploration and oil-services companies; alternative energy sources, from coal to electricity; and the agricultural sector, which is producing ethanol and other plant-based alternative fuels. While I have been urging investors to take profits on the major oil and gas producers and refiners (prematurely, I concede), I think long-term investors should have some exposure to energy-sector alternatives. This is hardly a new idea, and most of these stocks have already run up on such thinking. I'm not a momentum investor, so I'm not buying with oil still well over $70 a barrel, and I counsel patience. But I'd buy on even modest weakness. I'd be an aggressive buyer if oil ever again approaches $50 a barrel.

One of the savviest investors in the oil and gas arena I know is a Houston-based executive who recently told me he's been aggressively buying stocks in the oil-services sector. In the past, his suggestions have been impeccable. Among the stocks he mentioned are BJ Services (BJS), which specializes in pressure pumping, and Noble (NE), which focuses on deep ocean drilling. I recently sold Noble in some premature profit-taking but also own Smith International (SII), which makes a wide array of oilfield equipment, including drill bits. There are also oil-services ETFs, such as the Oil Services HOLDRs (OIH).

In coal, I have previously recommended Companhia Vale do Rio Doce (RIO), though, as I reported in an earlier column, I sold that and other commodity positions in an earlier bout of profit-taking. Rio has since gone on to new highs. It has the added advantage of being Brazilian, which also happens to be the world's largest producer of sugar cane, another source of alternative fuel. One way to gain exposure to both energy plays is a Brazilian ETF, such as iShares MSCI Brazil Index fund (EWZ). It's doubled in the past year, so again, I'd wait for a correction.

The agricultural sector is also benefiting from surging commodity prices. Among my favorites are Monsanto (MON), which I've persistently recommended, and Deere (DE), which I've owned in the past. Both are at or near 52-week highs. I also own DuPont (DD), which owns Pioneer and has a large agricultural component. DuPont is so large and diversified that its agricultural exposure is diluted, and it's also a big energy consumer, vulnerable to high oil prices. That may be why DuPont is well off its 52-week high of $49 a share. Still, I've been waiting patiently for DuPont shares to rise, and compared with other energy sector alternatives, it's cheap. It also yields more than 3%.

I encourage you do to your own research in these sectors for some more companies that are likely to benefit, especially those that aren't household names. A few of you have mentioned Ballard Power (BLDP), a perennially unprofitable developer of hydrogen fuel cells which may someday power autos. Its stock surged last week after it reported a smaller loss than Wall Street expected, but it's too speculative for my taste. Feel free to email me with other suggestions.