How to Play the Energy Rally Today… and Tomorrow
Note from Michael Salvatore, Editor, TradeSmith Daily: Quick note before today’s Daily…
The free recommendation our CEO, Keith Kaplan, shared last week, the latest from our new “Green Day” seasonality strategy, goes live this week.
Even if you’re skeptical, consider taking at least a small position in this stock when the markets open on Friday at 9:30 a.m. Eastern. This will give you a feel for the strategy, which would’ve turned every $10,000 into $87,500 in our backtest.
Here’s a look at the seasonality chart…
This Friday, the stock is about to enter a massive Green Zone that lasts through mid-April and produces a 23% gain more than 93% of the time… and with most of the gains coming before February.
Keith gave out the ticker for this trade in our debut broadcast last Wednesday. You can still get it here, but don’t wait long. Our charter offer comes down tomorrow.
Now, read on for a play on the red-hot energy sector…
2025 kicked off with a twist.
Former leaders are lagging… And recent laggards groups are popping.
Specifically, tech’s massive top position has taken a break while lowly energy stocks got a boost.
While it’s too early to call this a true trend change, it does suggest that being diversified makes a lot of sense right now.
Check out the table below, a sector snapshot for the S&P 500 sectors:
Energy stocks are by far the best performers, with a nearly 3% gain, followed by a modest 1.5% lift for Health Care.
Big 2024 winners like Financials and Technology are down 2.1% and 1.7%, respectively.
Does this suggest a new market sheriff is in town? No, it’s too early to call.
But it does suggest that sectors outside of the mighty Magnificent 7 can make you money.
And if you’re looking for stock ideas outside of the mainstream, we’ve got you covered!
Once we unpack the latest energy situation, I’ll lay out a high-quality stock in the energy patch that’s had a lot of momentum recently… And history says that’s a good thing.
As an added bonus, I’ll also provide a killer signal study that you’ll want to have at the ready a few short weeks from now.
Now let’s turn our attention to the latest rally in crude prices.
Energy Stocks Are the Best-Performing Sector Year-to-Date
There’s a lot happening in the macro world. One major theme is the swift jump in crude oil prices.
By looking at the front-month WTI continuous contract, we can see that prices have jumped nearly 14% since the December low of $67.20.
The latest reading pegs the black gold at $76.58:
This lift in the commodity has been the main driver of energy stocks’ outperformance lately. When crude rips, energy producers benefit. Margins expand. Cash flows increase.
But you shouldn’t buy just any oil play…
First, you need to check under the hood.
And second, make sure the asset is beginning an uptrend.
Regular readers will know these two steps as our two Power Factors. We want stocks with the best sales and earnings growth… and the price momentum and institutional sponsorship to make those fundamentals matter.
One name fits the bill right now: Texas Pacific Land Corp. (TPL).
As the name suggests, TPL is large-scale landowner in the state of Texas, with approximately 873,000 acres in the Permian Basin.
Its business is simple: Generate value through the management of surface and royalty interests.
These are oil and gas royalties, surface leases, and water royalties. Fifty-seven percent of TPL’s revenues are from oil and gas royalties – it receives a percentage of gross revenues from wells drilled on its acreage.
Shares have done very well recently, with one-year gains of 162%:
Much of that has to do with the strong fundamental performance. Revenues have pumped from $450.9 million in 2021 to $631.6 million in 2023.
By 2025, estimates peg sales at $920 million. That’s big top-line growth.
The bottom line has also held up well over the same period, with 2021 net income of $270 million estimated to jump to $578 million in 2025.
Now you know why the stock has been a stud… a powerfully expanding business.
But it’s especially interesting today because it just saw a strong momentum signal.
What Happens After Texas Pacific Land (TPL) Gains Six Days Consecutively
Momentum is a powerful force… especially on high-performing stocks.
TPL shares just rose six days consecutively to start the month of January:
Setting aside the fact that stocks were broadly volatile in this time, let’s talk about the continuation pattern that typically follows.
We were able to isolate 70 prior similar instances just like this…
Since 1988, whenever TPL shares have gained six days in a row, here’s what happened next:
- Two weeks later, TPL shares gained 3.4%
- One month later, TPL shares jumped 4.6%
- Two months later, TPL shares soared 9.6%
Now, normally I’d call it a day and stop after such an evidence-based study.
But today, I want to give you a longer-dated signal to be aware of should energy stocks keep their luster.
We all know the oil and gas space can be very hit or miss over the medium term.
Here’s one study that can help us get a better handle on the potential for further energy gains in 2025.
It turns out that there’s a January effect for the S&P 500 Energy sector. That’s right, how the sector performs in the first month of the year often sets the tone for the first quarter and full year.
Check this out…
Going back to 1995, the Energy sector averages a first-quarter gain of 3.34% and full-year return of 8.9%.
Not too shabby.
However, when January is a positive month, the first-quarter average return jumps to 11.2%, and the full-year performance climbs to 18.8%.
It’s important to note, there were 13 positive Januarys in the look-back study, and 11 of those instances saw positive hits for both the first quarter and the full year… or 84%.
So now you’re all set with a potential 2025 energy playbook.
TPL shares are set to continue their momentum in the near term. If you’re more of a medium- to long-term investor, drill down on January’s energy performance.
If the sector is green… Chances are you’ll want to keep those oil and gas bets longer.
As always with stocks, simply follow the earnings.
With TradeSmith, follow the data.
That’s how you win!
Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily
Note from Michael Salvatore, Editor, TradeSmith Daily: Before our Breakthrough 2025 presentation goes offline tomorrow, watch the replay today and learn:
- Why our CEO, Keith Kaplan, is warning about Jan. 16 in today’s tricky market.
- The biggest “Green Day” money-making opportunity in 20 years. And why Keith urges you to turn away from long-term risk exposure to adopt this powerful new form of investing for 100% to 500% potential gains.
- Where Keith thinks stocks are REALLY going next. And more.
Just be sure to watch today because the presentation contains time-sensitive information on two free recommendations.