ETF Teardown: The Best Gas Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain elements in common, so if investors want to capitalize on the increasing energy consumption around the world, for example, they can turn to Energy Select Sector SPDR, which invests in a mix of oil, gas, and energy stocks.

But since this ETF invests in a number of stocks, it gives investors a broad diversity that also limits upside. For an investor who was, say, really hip to deepwater drillers but cold on gas retailer stocks, this ETF wouldn't fit the bill.

Fear not, Fool. In this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what the energy sector has to offer. To help, we'll use Motley Fool CAPS -- our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors quickly locate great stocks, any of the 5,000 rated stocks that are profiled in CAPS can be "tagged" with a descriptor that groups the company with others that share a certain quality.

Selecting the "Gas" tag in CAPS presents a list of 88 investments that trade on American exchanges. This particular collection of investments has risen 30.6% in the past year, compared to a 15.1% gain in the S&P.

To get a sense of which companies the CAPS community thinks are the best opportunities in gas today, we can sort this list by CAPS star rank, from one to a maximum five stars. Each of the individual companies can then be viewed for exactly who -- from Wall Street to Main Street -- is bullish or bearish on the company and why.

Getting down to the nitty-gritty
Here's a sampling of some of the higher-rated gas stocks our screen pulled up today.

Company

CAPS Rank

Chevron (NYSE: CVX  )

*****

Apache (NYSE: APA  )

*****

Suncor Energy (NYSE: SU  )

*****

Devon Energy (NYSE: DVN  )

*****

Ultra Petroleum (NYSE: UPL  )

****

Southwestern Energy (NYSE: SWN  )

***

The seemingly insatiable demand for energy has continued to drive many companies connected to the oil and gas industries higher. One of our highly favored gas companies sporting a five-star rank is oil sands miner Suncor Energy. A pioneer in the process of "mining" oil, the Canadian firm specializes in extracting bitumen from the ground, but also has natural gas and refining operations to offer a range of petroleum products.

With the massive reserves thought to be held in the oil sands of Canada, Suncor has the potential to grow its production capabilities well into the future. Even though the company has been busy lately with a major turnaround in its oil sands operation, it reported an impressive average production of 282,000 barrels per day in September. CAPS investors also see the company's long history in oil sands refining, giving it an edge even against other oil sands players such as Canadian Natural Resources (NYSE: CNQ  ) . A strong majority of CAPS investors are bullish about Suncor's ability to ramp up its production targets to meet demand, with those believing the firm will beat the S&P going forward outnumbering the pessimists by more than a 20-to-1 margin.

Another oil sands miner on our list, Devon Energy, actually put some of its oil sands up for sale a few weeks back to refocus the business on core properties. In addition to the oil sands operations, Oklahoma-based Devon is diversified in natural gas and has properties in a number of geographies including the U.S., Canada, Brazil, and China. The company reported double-digit production growth in its most recent quarter, thanks to booming gas output at its Barnett Shale site in Texas. CAPS investors like the prospects of Devon's onshore operations, as well as its deepwater drilling efforts, with 598 of 621 investors rating the company giving it the thumbs-up.

You can lead a horse to water ...
Plucking individual stocks from a diverse sector such as gas or oil is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than blindly taking a recommendation. After all, even the best stock pickers can be horribly wrong on a stock.

So, do you agree that oil and gas stocks are still the best places to invest? Or is alternative energy a better play? Give your own opinion in Motley Fool CAPS.


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