When buying and selling stocks, I ask myself how I can get an advantage over market conditions, corporate malfeasance, or economic fluctuations? One way to get ahead is by diversifying a diversified portfolio. Instead of buying a single technology stock, buy a semiconductor, a social network, a small cap internet security firm, and a bellwether blue chip. If you do adequate research, slowly add to your position, and sell high, then your return on investment will be better than if you had bought a single technology stock.
For a bellwether blue chip in the energy sector, General Electric Company (NYSE:GE) has a lot to offer. There is hard evidence that the U.S. is moving toward energy independence — and General Electric Company (NYSE:GE) will benefit from this shift. There is not enough room on the page to list all of General Electric’s energy projects. However, by buying General Electric Company (NYSE:GE), you are automatically diversifying your energy portfolio, since it is involved, in some form or fashion, with nuclear, renewable, water, oil, gas, and thermal energy.
Its most recent maneuver came just this month, with the announcement that General Electric Company (NYSE:GE) has acquired Lufkin Industries, Inc. (NASDAQ:LUFK), an energy equipment maker, for $33 billion. One of the talking points put out by Lufkin Industries, Inc. (NASDAQ:LUFK) is that this move makes sense because it builds upon General Electric’s 2011 acquisition of the Well Support Division of the John Wood Group PLC (LON:WG). If anything, these acquisitions are a sign that America will be producing more of its energy, and General Electric Company (NYSE:GE) is positioned to significantly capitalize from this quest for energy independence. One interesting point, is that General Electric was the leader in wind energy for 2012 according to BTM Consult. Some of this success can be attributed to expiring tax credits in the US. And yet, wind energy was responsible for a 39% drop in profits in General Electric Company (NYSE:GE)’s clean energy sector in the latest quarter. But this is just part of the picture. General Electric’s diversity allows it to benefit from trends and weather downturns. The future for America’s energy independence, at least for the foreseeable future, appears to be in shale. Oil and gas, not clean energy, will drive this company’s growth.
The acquisition of Lufkin enables General Electric to further take advantage of the shale boom. On May 3, the Federal Trade Commission gave General Electric U.S. antitrust approval to complete the acquisition.
Unlike General Electric Company (NYSE:GE), Sandridge Mississippian Trust I (NYSE:SDT) has a market cap well under $1 billion. And unlike General Electric, Sandridge Mississippian Trust I (NYSE:SDT) is a trust whose primary purpose is to acquire and hold royalty interests in oil and gas properties in the U.S. Quite simply, there are three main reasons Sandridge Mississippian Trust I (NYSE:SDT) makes the list. Number one, since it is a trust, it is required by law to pay back a majority of its earnings to its investors. In other words, it pays a healthy dividend of $0.59 per quarter per share, which is a dividend yield of 16.60%. Number two, it is oversold, trading near a 52-week low. Number three, it will benefit from America’s shift toward energy independence.
Based upon its most recent quarter and because it has found more natural gas and less oil at this point, many have suggested this stock to be stuck in place. Oppenheimer recently downgraded the stock to underperform from perform for this very reason. However, if natural gas prices climb or more oil is found, then the price is likely to climb significantly. An important point to keep in mind in relation to this investment is that quarterly distributions will fluctuate based on business expenses, market prices, and production volume.
The third play highlights the inescapability of globalization. If the majority of companies you invest in are headquartered in America, your portfolio is not diversified. We are all, to a certain extent, global citizens and consumers and this must be reflected in your portfolio. And currently, there is no better place to look for bargains than Europe. TOTAL S.A. (ADR) (NYSE:TOT), a French oil and gas company that operates globally, is the final puzzle piece for this strategy. TOTAL S.A. (ADR) (NYSE:TOT) is currently trading within a range that it traded in a decade ago, which is well below its all-time high. It also has a dividend yield of 7.43%, paying $0.76 cents per share every quarter. The recent move by the European Central Bank of cutting rates further reinforces the fact that European financial leaders are willing to solve their current fiscal problems. TOTAL S.A. (ADR) (NYSE:TOT) has directly benefited from this leadership. Its business is also not solely tied to European fluctuations; it has operations worldwide in well over 100 countries.
The bottom line
Diversifying gives the investor the advantage by maximizing possible return while mitigating exposure to a single company’s fluctuations. Instead of diversifying by picking a single stock in the energy sector, it is more advantageous to further diversify by picking three distinctly different places to put your money that takes into account globalization, market capitalization, and market trends.
The article Three Energy Plays for a Diversified Portfolio originally appeared on Fool.com is written by J.B. Eccard.
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