INVESTING: Though energy sector remains hot, avoid the herd

In July, I wrote about a few stocks that might help an investor take advantage of the rising oil prices. Up to the April 4 close, here are the results of those three stocks: Veritas, up 33 percent; XTO Energy, up 56 percent; San Juan Trust, up 60 percent.

The energy industry needs another look right now. High oil prices are a hot topic everywhere, and the low-hanging fruit of returns has been picked. I don’t want to make a claim for the sector’s long-term picture yet, but over the short and even intermediate term, these stocks are in need of a rest.

It is simply way too obvious, and when everyone else is buying, I’m selling. I don’t care if they march a lot higher without me; the risks are growing and there are better places today for money.

Throughout 2004, the longer-term futures contracts for oil were trading much higher than near-term contracts. This demonstrated a belief by smart money in the oil business that the perbarrel price had a lot of upside. But now, the longer-term contracts are trading about where oil is priced today. Speculators aplenty are getting involved in oil and oil-related stocks, but the big money in the industry is cooling on the longerterm prospects.

Another sign that these stocks are due for a pullback came with Chevron Texaco Corp.’s recent announcement of a takeover of Unocal Corp. Both stocks dropped. And giant Exxon Mobil Corp. has not made any headway in more than a month.

The recent popularity of energy stocks is unlike anything seen since the Internet days of the late 1990s. A few days ago, an analyst at Goldman Sachs claimed oil can spike to $105 a barrel. That reminds me of those analysts covering Qualcomm Inc. and Amazon.comin 1999 predicting the shares would keep doubling every six months, when, in fact, the entire market was within weeks of a multiyear high.

The reason I won’t speculate about a longer-term price for oil today is because there is no reason to. I am selling oil stocks now. If they present themselves again as a low-risk buying opportunity, I will buy them back. The popularity is so over-the-top now that another opportunity may not be around for a while.

That’s OK. The herd is strongly following oil stocks right now. Investors are not going to outperform the market by following the herd.

A friend of mine recently said energy stocks are like home builders were a few months ago. I disagree. Despite the huge run-up in home-builder stocks over the last two years, there hasn’t been a complete one-sided opinion as to their future. The bull market in building stocks is certainly showing its age now, but it seems there have always been a few dissenters around.

I would not own any stocks in that group today, and when it comes to real estate itself, the market looks frothy. Regarding investments in development projects, I am hearing things like, “This is a sure thing.”

That’s enough of a reason for me to stay away.