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A Good Way to Play Small Cap Energy Stocks

energy stocks

Over the next few weeks, I will be buying something that, for years now, has been extremely disappointing. If that makes no sense to you, bear with me for a bit. The play is based on a strategy almost as old as the stock market, and a news story that makes now seem like a good time to employ it.

The principle of reversion to the mean, the idea that sectors and stock styles fall in and out of favor but always return to their long-term average relationship, is one of the oldest and most influential in the worlds of trading and investing. It is the basis of contrarian trading, which regular readers will know is my preferred style, and if used properly, inevitably leads one to follow the most basic advice for traders and investors: to buy low and sell high.

It is also the reason I have been sniffing around some small cap energy stocks recently. Both of their defining characteristics make them look like a buy, as small cap stocks and energy stocks have both lagged the broad market index, the S&P 500, quite considerably over the last couple of years. The problem is that small cap energy stocks are often small, and stay small, for a reason. Without big resources on which to draw, it is hard for small E&P or integrated firms to grow, and small alternative energy companies are usually at a disadvantage competing with the big boys when it comes to the capital investment needed to keep pace with technological advances.

However, there is right now a dynamic that…

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