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A Cushioned Contrarian Trade In Energy

Oil

Now, according to the prevailing consensus, is a bad time to be considering any stock in a utility. Interest rates are climbing, and as most utilities have high debt loads and relatively high dividends that leaves them vulnerable to a double whammy. Their debt servicing costs look set to rise and their relative value as yield bearing securities fall as interest on Treasuries and other fixed income products rise. Still, despite that obvious logic, I am bullish right now on a small cap utility, Spark Energy (SPKE).

As I said, the consensus view is negative on the sector, but I learned a long time ago that in any financial market, following consensus views, particularly once they are well established, can be hazardous to your wealth. They are, by definition, both logical and obvious and that is true regarding the case against utilities laid out above. Markets, however, are forward discounting mechanisms, and by the time a view becomes a consensus all the possible effects are usually priced in.

That means there is a limited downside to following the herd and a large upside to being contrarian and finding opportunities where the risk/reward ratio skews in your favor is the essence of both trading and investing. SPKE, after losing over sixty percent between the high in June of last year and the low a couple of weeks ago is a case in point.

(Click to enlarge)

As you can see from the chart above, the stock has bounced a little off that low, but…




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