Energy Stocks to Buy Now Do Not Include Saudi Arabia’s Aramco

Paul Dykewicz

Sempra Energy

Energy stocks to buy now do not include Saudi Arabia’s national oil company Aramco, which just completed its $25.6 billion initial public offering (IPO).

The huge offering still lets the Saudi royal family retain 98.5 percent of Aramco’s shares, but investors may prefer different energy sector companies that offer better potential for share price appreciation, dividend payouts and no threat of undue influence by the nation’s rulers. Less traditional energy investments that are part of diversified companies that operate other businesses offer investors reduced risk.

A big deterrent for U.S. investors to buy Aramco’s shares is that they will be listed on the Saudi Stock Exchange, the Tadawul. Since the stock will not be available on U.S. stock exchanges, shareholders will lack the protection of investing in companies that comply with the rules and regulations of the U.S. Securities and Exchange Commission (SEC).

Aramco’s IPO price reached the top of its range of 32 Saudi riyals, or $8.53, per share, and surpassed the world’s previous largest initial offering of $25 billion in September 2014 by Alibaba Group (NYSE:BABA). The IPO values Aramco at $1.7 trillion to give it the distinction as the world’s largest listed company by market capitalization. However, the valuation fell $300 billion below the $2 trillion reportedly sought by Saudi Crown Prince Mohammed bin Salman.

‘IPO Edge’ Leader Hilary Kramer Discusses Energy Stocks to Buy Now

“The Aramco IPO will be huge, said Hilary Kramer, who hosts a national radio investment program called “Millionaire Maker” and leads the 2-Day Trader service that has netted profits in 20 of its first 25 trades for an average return of 8.70 percent.

While the company is priced far below the Saudi Arabian government’s initial $2 trillion target for the stock offering, it literally would take a company the size of ExxonMobil (NYSE:XOM) to fill the gap, Kramer said. The IPO still is going to reshape the global investment landscape, she added.

Global index funds are going to need to sell enough of every other stock to make room for Aramco in their portfolios, said Kramer, who launched her new IPO Edge trading service on Dec. 10. Energy funds are going to need to make even more room to include Aramco shares, Kramer continued.

“Thankfully, most funds are weighted by free float instead of pure market capitalization,” said Kramer, who also leads the GameChangers advisory service that has booked 33 profitable trades in its last 39 closed positions.

Paul Dykewicz interviews Hilary Kramer, whose new 2-Day Trader service is 20 out of 25 in recommending profitable trades averaging 8.7 percent returns since its launch.

“If the full $1.7 trillion hit the open market, Saudi stocks would need to be more heavily weighted than everything in China put together, said Kramer, who also leads the Turbo Trader, High Octane Trader and Inner Circle advisory services. “Instead, the free float is barely going to reflect the role the Bank of China plays in global portfolios. It might ultimately displace 3 percent of energy sector funds.

“These funds will be forced to buy Aramco because of its sheer size, not because they think the company is a good or bad investment. I would not recommend it to retail investors for a lot of reasons. For one thing, the Saudi royal family still owns about 98 percent of the company, so minority shareholders have practically zero voice, especially when you consider that many of the people who will be buying the stock in Riyadh are insiders in one way or another. That’s always a red flag.”

Aramco also is in decline, Kramer said. Five years ago, Aramco pumped about 12 percent of all global petroleum, but the company’s presence in the global oil market has receded about 2 percent since then, despite boosting its production slightly, she added.

“That’s significant lost ground in a world where every percentage point of share represents $58 billion a year in revenue,” Kramer said. “U.S. producers are taking that business.”

Chevron Chosen as One of the Energy Stocks to Buy Now

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Kramer said she prefers to own Chevron (NYSE:CVX) rather than Aramco. Both companies have boosted oil production about 500,000 barrels a day during the last five years but that expanded output really pushes the investment needle for Chevron, compared to much bigger Aramco. Thus, Chevron’s output is up 20 percent in a period when Aramco essentially stood still, she added.

Chart courtesy of www.stockcharts.com

Chevron’s dividend payouts have kept up with that growth by offering a 4 percent yield and there’s a good chance the stock will pay close to 5 percent by 2025, Kramer continued.

“Aramco could take on every other global oil company at once, but size isn’t everything,” Kramer counseled. “You want dynamism, and that’s where U.S. producers are catching fire.”

Omit Aramco Among Energy Stocks to Buy Now; Go Brazilian Instead

Aramco’s earnings have declined, and the company faces risks such as geopolitical instability and concerns about global warming that could curtail the use of fossil fuels. Indeed, aerial attacks on Aramco facilities in September 2019 showed firsthand the geopolitical risks faced by oil companies operating in the Persian Gulf. 

“Forget about trying to invest with the Saudi royals,” said Jim Woods, editor of Bullseye Stock Trader, Successful Investing and Intelligence Report. “Instead, I prefer to focus on energy stocks with strong and proven earnings growth, strong relative price performance and that are demonstrating a bullish chart pattern.

“One stock that hits all my marks is Cosan Ltd. (NYSE:CZZ),” Woods told me. “The Brazilian energy producer specializes in biofuels, including ethanol, gasoline, diesel fuel. What I like most about CZZ is its tremendous earnings growth. Last quarter, earnings per share grew by 833% year over year. Over the past three years, earnings are growing at an annual rate of 72%. Now that is some serious profit fuel.”

Chart courtesy of www.stockcharts.com

Since early November the market has undergone some notable sector rotation, with cyclical stocks rearing up — some for the first time in over a year, said Bryan Perry, who heads the Cash Machine and Hi-Tech Trader advisory services. Within the many sub-sectors of the deep cyclical universe, investors looking for above-average dividend yields, and potential capital gains should consider companies in the chemicals industry that serve energy companies, Perry added.

Pricing power for many resins, additives, polymers and compounds are beginning to improve — and were noted to be so in the latest third-quarter financial transcripts following the release of earnings, said Perry, who also leads the Quick Income Trader and Instant Income Trader services that feature both stock and option trades.

Bryan Perry

“Two names come to mind for where I see opportunities,” Perry said. “Dow Inc. (NYSE:DOW) was split from DuPont earlier this year, is a member of the Dow Jones and trades at its initial $53 spin-off price. The stock pays a handsome 5.3% dividend yield and just posted earnings of $0.91 versus $0.73 estimate, a 24.3% upside surprise and the company gave upbeat forward guidance.” 

Chart courtesy of www.stockcharts.com

The other stock that has Perry’s attention is commodity chemical maker LyondellBasell Industries (NYSE:LYB), which sports a 4.6% dividend yield. The company reported in-line Q3 results, but quarter-on-quarter showed improvement, and the stock popped from $90 to $98. It since then has retraced that earnings spike.

At a current price of $90, the stock is attractive for purchasing, with LyondellBasell continuing to buy back shares and boost its dividend payout. The share repurchases and dividend hikes provide a key differentiator between it and similar companies. 

Chart courtesy of www.stockcharts.com

Honeywell Becomes Surprise Addition to Energy Stocks to Buy Now

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“This sector poses several risks to investors,” said Bob Carlson, who leads the Retirement Watch advisory service. “The businesses tend to be cyclical. Profits are very dependent on economic growth. Even the stocks of the best companies will lose substantial value in a recession. The companies also tend to use a lot of debt, which increases risk.

“Substantial investments in research, exploration and development are required for a company to ascend to and remain at the top of its sector. Companies that reduced research budgets to improve earnings in the short run almost always damage long-term prospects.”

A less risky way to profit from the sector is to invest in a diversified supplier, Carlson counseled. A good choice is Honeywell International (NYSE:HON), which pays a 2.06 percent dividend yield. The conglomerate historically is an industrial company but has been adapting to changing times by becoming almost a software company, he added.

HON’s specialty is controls of buildings, planes, and the processes of many energy and chemical companies, Carlson said. It is the dominant firm in this specialty, he added.

“As energy and chemical companies expand and prosper, so does Honeywell,” Carlson said. “Because it is more diversified and doesn’t carry some of the risks inherent in energy and chemical companies, it’s a good play for a conservative investor.”

Chart courtesy of www.stockcharts.com

Energy stocks to buy now range from American to Brazilian and from traditional pure plays like Chevron to diversified Honeywell. With oil prices holding above $60 a barrel and U.S. economic growth showing renewed strength, energy stocks could add pep and dividend payments to a savvy person’s investment portfolio.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. Follow Paul on Twitter @PaulDykewicz.

 

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