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Getting the Right Mix of Energy Stocks

This sector has been ripe for gains, but playing it has been tricky. But a new holding could be what's been missing.
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With oil and gas prices staying above their historical averages, I've been calling for a valuation recovery in the energy patch. I've played this thesis many ways in recent months. I initially made a quick 15% with ChevronTexaco (CVX) , but that stock took off before I could build up a sizable position. I then tried playing rising gas prices this through my independent power field bet. I held AES (AES) , El Paso (EP) and Dynegy (DYN) for moderate gains, but these companies had too much debt and too many issues from prior management hanging over them to really trade up to the real value of their pipeline assets.

But now I want to step up and really put my money where my mouth is. I have a few openings in the portfolio for new names, and I want that new stock to be in the energy sector. With that in mind, I'm going to initiate a position of 1,000 shares in Kerr-McGee (KMG) once the market opens. The stock was knocked down a few weeks back when the company announced the purchase of Westport Resources, which set off a purchasing spree in the Rockies. I think the deal makes strategic sense, and also should add $150 million to the company's annual cash flow.

At $50.05 a share, Kerr trades at less than 12 times expected earnings, which is a discount to its peers. The company's secure 3.5% dividend is also a standout in a business where most folks, like Anadarko Petroleum (APC) , yield less than 1%.

When you add BP (BP) and Halliburton (HAL) to the mix, I think we finally have the right mix of energy stocks in the portfolio.

Regards,

James J. Cramer

DISCLOSURE: At the time of publication, Cramer was long BP and Halliburton.