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Without fail, every year there are January surprises.
They occur when investors receive a pop in selected stocks because of the way fund managers readjust their holdings to dress up their fourth quarter performance.
These improvements don't usually last very long.
In fact, most investors will see the affected stocks decline back to normal levels by mid- to late-January.
But for a few weeks, investors can earn a nice little return as the calendar begins the New Year. This hedge-fund effect will be of special interest to energy investors in 2013.
That's in stark contrast to last year when oil-related stocks were moving in one direction while natural gas stocks were moving in another. What's more, service companies were beginning to come off of their highs at this point in 2011, and King Coal was about to fall off a cliff of its own.
This time around, we have a fiscal cliff soap opera in the U.S., continuing credit concerns in Europe (although with a parallel rise in market optimism emerging on the continent), rising uncertainty again in the Middle East, and a simmering dispute between Japan and China.
In short, even ignoring the Mayans and their approaching December 21 deadline, there is no lack of concern in the market these days.
Still, there will be several beneficiaries in the energy sector as hedge fund managers make their moves over the next few weeks. This is likely to happen across several categories of companies.
In this case, investors would be wise emphasize two segments of the energy market that are currently on the rise: oil refineries and coal stocks.
In each case, the rise prompted by fund managers is not likely to last into February. However, in the case of these shares, we will see a rise resulting from market forces themselves.
That means the extra pop from a January surprise is not likely to be followed by a drop-off.
Going Long Oil Refiners and Coal Stocks
The first category are oil refineries that have a diversified regional impact and sufficient refining capacity to address both light (high octane gasoline and early processing cuts like naptha and liquid petroleum gas) and middle (diesel, high-end kerosene – actually jet fuel, and low sulfur content heating oil) distillates.
Now refineries have been performing quite well even without the help of the fund managers.
Both VLO and WNR have been adding strength to the EA Portfolio and are prime candidates for January surprise material.
The second category is not one I would have selected a few months ago.
But certain coal sector stocks have attracted the attention of the funds due to an upward pressure on share value this month. Two primary stocks of interest here are Peabody Energy (NYSE: BTU) and Cliffs Natural Resources (NYSE: CLF).
BTU is up 6% and CLF up 19.44% since December 3.
Each stock hit its most recent low on that date after it traded considerably above that level earlier in the quarter. December 3rd appears to have represented an initial strike point for interest from some fund managers in these shares, a move that has increased since then.
Here's How to Play It
All of the refiners and coal stocks mentioned are likely to improve in price through the first part of January.
However, by around January 15, the trajectories should change.
Refiners like VLO and WNR will continue to appreciate, albeit at perhaps slower increments than over the past month. These shares, therefore, are better candidates for longer-term holds.
When it comes to the coal stocks, the prospects are a bit different.
While the demand for metallurgical grade coal (the coal needed for the production of steel) will continue at current levels or slightly better, overall coal demand should begin to decline.
In past years, the onset of the winter months would suggest a continuing need for power and heating fuel. That may continue to be the case in certain regions of the U.S. where coal continues to be the main source of fuel. However, that is no longer the case across the board.
Now, the increasing reliance on natural gas as the fuel of choice for electricity and thermal generation will blunt the normal move to coal during the winter season.
Therefore, BTU and CLF appear to be good candidates for sale in January (when the somewhat artificial bump from the managers has worked its way through the market).
A basic suggestion on these two would be a lightening of half your position half way through January and selling the remainder by the end of the month.
An unusually cold January may prolong the upward bias for either stock a little longer, but it is not going to change the overall decline as the first quarter moves along.
Either way, the start of the New Year should be fruitful for energy investors in two sectors.
[Editor's Note: If you want to know the full story on how the energy markets really work, and what stocks Kent is recommending right now as January 1 approaches, click here to see this eye-opening presentation.]
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.