Oil-services stocks are booming.
These are the "nuts and bolts" plays of the oil industry. They provide drilling equipment and service crews to oil giants like ConocoPhillips and ExxonMobil.
Last year, I told you oil-services stocks like Schlumberger, Halliburton, and Baker Hughes would be big beneficiaries of the massive amount of money oil companies are spending to find oil
Spending has risen by more than 10% annually since 2009. And it's not expected to slow down any time soon. According to investment firm Barclays, international oil companies are expected to spend more than $700 billion
to find oil and gas this year.
Schlumberger, Halliburton, and Baker Hughes are up an average of 67% since January 2013. And they're trading near 52-week highs today. If you took my advice to buy these names, you're sitting on solid gains. And there's more upside ahead
But there's another way to profit from the energy-spending boom right now.
Let me explain...
As I've told you in these pages many times, the world's biggest oil companies are having trouble replacing their reserves each year.
There is plenty of oil in the ground yet to discover. But it's becoming much more expensive to find oil that's economical. As a result, oil companies are spending more and more each year to find oil.
While oil companies need more drilling equipment and service crews to find oil and gas, they also need more infrastructure, like drilling rigs and platforms.
That's where industrial companies come in.
Industrial companies help build everything from solar panels, commercial buildings, roads, and bridges, to oil rigs and platforms. Some companies have huge exposure to several of these sectors.
Take General Electric, for example. The industrial giant has so many divisions it's almost impossible to keep track of them. It has power & water, lighting, transportation, health care, real estate, and oil-and-gas and energy management divisions, to name a few.
But the company's oil-and-gas and energy management division is one of its largest, based on sales. Just some of the services this division provides are parts used in drilling rigs, wells, and platforms all over the world.
Industrial companies like Jacobs Engineering and Flour also receive a large portion of their sales from oil and gas infrastructure projects. And they have major operations all over the world – just like General Electric.
These companies will also be beneficiaries of the oil and gas spending spree.
The best way to invest in industrial companies like General Electric, Jacobs Engineering, and Fluor is through the Industrial Select Sector SPDR Fund
, Stock Forum
). XLI holds a basket of industrial stocks. Its top holding is General Electric. XLI also holds Jacobs Engineering and Fluor.
And as you can see below, XLI has quietly been outperforming the S&P 500 this year.
Even though it has outperformed the market over the past 12 months, shares are still cheap. XLI is trading at 17 times earnings. That's a discount to the S&P 500, which is currently trading at 18 times earnings. Plus, industrial companies are growing much faster than the average S&P 500 company right now.
XLI is not a pure play on the oil and gas industry. But it's a great way to gain some exposure to one of the greatest trends in the world. I do not see a slowdown in oil and gas spending any time soon.
My advice is to buy XLI today. There's plenty of upside ahead.