SIVY ON STOCKS from money.com
May 23, 2001

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Stock strategies for the energy mess

High oil prices and electricity shortages may put pressure on economic
growth. Here's what you can do to protect your portfolio from the power
crunch -- and maybe even profit from it.

By Michael Sivy

Anyone who has been reading this column over the past few months knows why
I think the recent market upswing is the start of a major recovery in stock
prices. But there is one fly in the ointment -- energy prices have been
soaring at a rate not seen since the 1970s. Since January 1999, in fact,
oil prices have more than tripled, while the cost of natural gas has more
than doubled. In addition, California -- and other West Coast states, to a
lesser extent -- have been suffering from electricity shortages that have
pushed up power prices.

Memories of the mid-1970s oil crisis -- along with double-digit inflation
and a crushing recession -- are still fresh in many investors' memories.
But today, the real threat isn't inflation -- it's the drag on economic growth.

Demand for energy is relatively inelastic. In everyday terms, that means
that people buy roughly the same amount of gasoline and use roughly the
same amount of heating oil no matter how prices change in the short run.
When prices are high, therefore, the extra costs simply come out of money
consumers would have spent on something else. That creates a drag that some
economists call an "energy tax." Fortunately, the negative effect on
overall growth is fairly small -- maybe a quarter of a percentage point a
year -- and the stimulative effect of lower interest rates and the tax cut
will more than overcome that.

Individual sectors and specific stocks may be a lot more directly exposed
to high energy costs, however. So assess each of your holdings to make sure
its profits won't be hurt significantly by fluctuations in energy prices.
Instead, look for companies, such as Johnson & Johnson [JNJ], that have
impressive track records of consistent earnings gains and dividend increases.

Of course, there will also be a chance to cash in on the renewed boom in
oil and gas exploration. Just remember that many such stocks already
reflect those opportunities. Vice President Cheney's old firm Halliburton
[HAL] will be a prime beneficiary of the Administration's energy plan. But
Halliburton shares -- up 50 percent since April -- look expensive at 36
times this year's earnings.

Surprisingly, there are still a fair number of value plays in the oil
sector. Domestic integrated oil companies, such as Amerada Hess [AHC] and
Phillips Petroleum [P], trade at P/Es below 10 and will continue to profit
enormously as long as oil and gas prices remain fairly high. Unocal [UCL],
at an 11 P/E, is also attractive and is rumored to be a takeover target.
Those may not be the most exciting stocks, but they'll surely help to
balance any stock portfolio that is betting heavily on a resumption of
economic growth.

==============
Read more analysis of what the energy situation means to investors and
consumers in money.com's "Power crunch":
http://www.money.com/money/depts/investing/energy/

###

Post your comments on Michael's column at:
http://www.money.com/depts/investing/sivy/index.html

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http://www.money.com/email/

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