Leaning Into Energy Stocks as Midterm Elections Draw Near
I can’t predict the midterms, but I can see I was let down by Johnson & Johnson — and that energy stocks are surging.
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I don’t care to make predictions about elections. Even professional pollsters have difficulty with that task.
I will predict that hostilities in the Middle East are about to intensify. Pres. Donald Trump has repeatedly said he will not attack Iran prior to the midterm elections. Those elections are less than three weeks away.
Meanwhile, Iran has ramped up attacks on shipping in the Strait of Hormuz. According to U.K. Maritime Trade Operations, 11 such attacks have occurred in the past four days. Earlier this week, Trump threatened to retaliate, saying he would “hit Iran hard.”
Once again, the U.S. and Iran are on a collision course. When they collide, oil prices tend to rise. It’s not difficult to imagine West Texas Intermediate crude oil back above $100.
Taking Profit to Buy Energy
Like many investors, I was disappointed with this week’s earnings report from Johnson & Johnson (JNJ). The New Jersey-based healthcare provider cited weakness in medical technology sales, which grew by just 2.5%.
Operationally, international sales were up by 1.8%, but when the strong U.S. dollar is factored in, overseas sales grew by just 1.5%. About 43% of Johnson & Johnson’s sales come from outside the U.S.
J&J is sliding toward its 200-day moving average (red line). We initially recommended this stock at $205 (point A). By selling now (point B), we can lock in a gain of about 23%.
All charts via Tradingview
Reallocation of Funds
What will we do with the proceeds of our Johnson & Johnson sale? We’re going to roll those funds into three names in the energy sector. We have existing positions in all three stocks.
First up is APA Corporation (APA). We opened our position in APA last month, as the independent energy company’s technical charts dovetailed nicely with its fundamentals.
At that time, APA was breaking out of a six-month long consolidation pattern. Thanks to a subsequent pullback and rally, the stock now appears to have rallied from a cup and handle pattern (shaded yellow).
APA Corp. reached a new 52-week high earlier this week. We are maintaining our earlier price target of $58 for the stock. APA is scheduled to report earnings on Nov. 4.
Adding to Two More Existing Positions
We are also adding to two other names in the energy sector. EOG Resources (EOG) also reached a 52-week high on Wednesday. The independent energy company is scheduled to report earnings after the Nov. 5 close.
ConocoPhillips (COP), which we recommended about a month ago, also reached a 52-week high. The energy exploration and production company is scheduled to report earnings on Nov. 5.
All three names reached new 52-week highs this week, and all three appear to be breaking out from cup and handle patterns (shaded yellow).
Bottom Line
Pharmaceutical stocks like Johnson & Johnson have performed well this year, but have lost momentum in recent weeks. Meanwhile, energy stocks have greater potential in the short-term. Despite our sale of J&J, we’re maintaining most of our pharmaceutical holdings, while sizing up our positions in energy as described above.
At the time of publication, Ponsi was long EOG, APA and COP,
