Fund manager's comment/Gil Knight
A current bright spot in the US economy is the energy sector, which is benefiting from California's power woes and a surge in gasoline prices. Energy enthusiasts believe the sector still has potential for more growth, especially with Bush's agenda to increase the country's production levels by a vast degree.
To a certain extent, the energy sector has replaced the technology sector for new growth stocks, particularly for the makers of equipment and power plants. Following the on-going crisis in California, investors are starting to look at the sector in a new light.
At Govett Investments, our US Opportunities fund is now focusing on energy/utility-related producers and distributors as we believe the power, construction and engineering industries are looking very interesting in terms of top-line revenue growth over the next three years.
Energy service and exploration stocks, particularly in the small and mid-cap areas, currently have attractive valuations and we are starting to conduct more research into this area.
The energy crisis that has hit California and is threatening some other regions of the US, such as New York, is principally associated in the popular mind with deregulation, the opening up of power generation to competitive forces and letting consumers choose their supplier.
To a certain extent this is misconceived, in that it has had more to do with the result of residential regulation, such as freeing wholesale but not retail prices, an initiative that has created strong disincentives to building new power generators and extending the power grid.
The California utility companies have been most directly affected by the current energy crisis in that they are having to pay higher prices to suppliers than they are allowed to charge to consumers.
The companies that have benefited, and will continue to benefit, from the rising prices are the equipment manufacturers and unregulated power producers.
The electric generation grid is expected to suffer increased stress during the peak summer cooling load demand period when temperatures soar across the country. With 'black outs' expected on the West Coast and 'rolling brown outs' in the Northeast, energy stocks should hold up well, particularly with natural gas consumption for electric generation, as natural gas is used for fuel switching.
Potential problems on the horizon for the sector could be the recent decline in crude oil futures prices and a shift in the US Senate from a Republican to a Democratic majority, potentially leading to some tough battles for Bush's energy plan.
While we are somewhat concerned about the decline in natural gas and oil prices, we continue to believe these will recover somewhat in July and August. In the meantime, share prices have already corrected fairly sharply.
l Energy sector growth replacing technology.
l Construction industry looking interesting.
l Small/mid-cap energy stocks attractive.
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