Oil and Gas Plays to Energize Your Portfolio

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It's hard not to be bullish about the current stock market. When we're in a bull market even the scary headlines become a yawn or are rationalized into obscurity.

Don't get me wrong, I'm aware of the fact that we've had an incredible move higher since the lows in 2009. One of my family members sent me this quote from a publication she subscribes to: "As a reminder, bull markets have averaged about 39 months in length. As of January 2013, this particular bull is 47 months old, which puts it overdue for a correction."

Here's another reason why a number of financial analysts are somewhat leery. After four straight years of stock market gains, those bold enough to predict where major market indices will be by the end of 2013 are almost unanimously bullish.

This bullishness was illustrated in the Dec. 17, 2012, edition of Barron's. Its panel of experts forecast a 10 percent rise in stocks for 2013 and not a single one was bearish. Maybe that's because we're in an age where the Federal Reserve and many global central banks are goosing the economy more than ever!

If only we could have a nice 5 percent to 10 percent correction! I've given plenty of hints and price suggestions about stocks I'd like to own or positions I'd add to during this latest version of "The Wealth Effect" that generous monetary policies create.

Some investors and traders are a bit late to the party. They want to find sectors where growth-and-income stocks are still available and not overpriced. Here are a couple of examples from the energy patch worthy of consideration.

With West Texas Crude still above $97 a barrel and natural gas demand alive and well, take a look at Linn Energy. It was founded in 2003 and hails from the energy capital of America, Houston.

Linn Energy is an independent oil and natural gas company that engages in the acquisition and development of oil and gas properties. The company's properties are primarily located in the Mid-Continent, the Permian Basin, Michigan, California, and the Williston Basin in the United States. "Eureka," "black gold" and "Texas tea" are terms that come to mind when I think of these energy zones.

As the company's website states, "Linn Energy's mission is to acquire, develop and maximize cash flow from a growing portfolio of long-life oil and natural gas assets."

That's why it can offer shareholders a current dividend yield that is a likeable 7.77 percent (especially nice if seven is your lucky number).

As of Dec. 31, 2011, it had proved reserves of 3,370 billion cubic feet equivalent of oil and gas, and natural gas liquids, as well as operated 7,759 gross productive wells. It's no secret that investment educator and CNBC entertainer extraordinaire Jim Cramer has liked Linn Energy for a long time.

Why, just the other day in a mighty interesting article titled "Four Deals in the Oil Patch?" Cramer waxed eloquent on his latest take on Linn Energy:

Linn's been a leader in developing properties cash off by others, including BP and then quickly bringing great returns to shareholders. I love that Linn offered Linn, with its bountiful 7 percent plus yield for non-taxable accounts. The company's growing its holdings like weeds, yet it stays at a ridiculously low $7 billion valuation.

On Thursday, Linn Energy's shares rose to $37.33 on a huge spike in volume, bringing the market cap up to $7.45 billion. As the five-year chart below illustrates for our viewing pleasure, Linn Energy has come a long way, and with the one-year analysts' consensus estimate price target of over $44, has even more room to rise.

As you can see from the chart above, the last reported quarter saw a drop in revenue per share, so when Linn Energy steps into the earnings confessional on Feb. 21 it better show improvements and guide well. In fact, the analyst consensus estimate for sales growth and revenue for this latest quarter is for an increase of almost 72 percent. The company will also have a fourth-quarter earnings conference call at 11 a.m. ET on Feb. 21.

The average estimated revenue for 2012 is for a total of $1.72 billion, an impressive 48 percent increase over revenue in 2011. In 2013 analysts are anticipating more sales growth with annual revenue expected to increase yet another 40 percent.

Also in the energy sector and still on sale is Hess, an integrated energy company that is considered a "take-apart" candidate where the sum of the parts are likely to be worth more than the whole. Even though it pays a puny dividend, this potential for lucrative spinoffs from the company is the big prize!

TheStreet's research department rates Hess stock a "buy," stressing, "The company's strengths can be seen in multiple areas, such as its compelling growth in net income, increase in stock price during the past year, attractive valuation levels, good cash flow from operations and impressive record of earnings per share growth. We feel these strengths outweigh the fact that the company shows low profit margins."

You can see from the five-year chart below that Hess' share price and quarterly revenue per share have moved in virtual lockstep. It also indicates to me the stock price has room to soar on the upside.

The company operates in two segments, exploration and production and marketing and refining. Hess has a market cap of $23.27 billion and is part of the basic materials sector and energy industry.

The company has a trailing price-to-earnings (P/E) ratio of 10.49 and a forward (one-year) P/E of 10.92, below the S&P 500 P/E ratio of 17.7. Shares are up over 28 percent year to date as of the close of trading on Thursday.

Perhaps if we're really fortunate we can snag some shares of HES at $66 or lower during a market correction. That's why corrections shouldn't be feared.

If you know what you want to buy and the price you want to buy it at, it's the corrections that will make your wishes come true. Just be careful what you wish for!

By TheStreet.com Contributor Marc Courtenay

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At the time of publication, Marc Courtenay had no position in any of the stocks mentioned.