Markets

2 Cheap Energy Funds to Buy Before They Rip Higher

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By Michael Foster

What a year itaEURtms been for oil!

Oil Takes Off

With a 43.5% climb in just a year, have blown by several technical levels to breach $70, and $80 is on the table by the end of the year.

With a 43.5% climb in just a year, oil prices have blown by several technical levels to breach $70, and $80 is on the table by the end of the year.

This is the highest price since 2014, and itaEURtms a very good sign for stocksaEUR"which is why you should consider buying 2 funds paying massive dividends and boasting top-notch energy-sector exposure.

(And if you prefer to invest in oil through individual stocks, rather than funds, check out this recent article by my colleague David Peltier.)

Before I show you my 2 energy funds, though, letaEURtms talk a bit about what isnaEURtmt happening with oil.

First, oil is nowhere near the $100 range it maintained in the early 2010s. And since the economy is much stronger now than it was back then, we know that oil can easily get back to that $100 range without being a big drain on consumer spending.

That alone is a great reason to bet on oil.

You can see this in the fact that even though gas prices are high these days, weaEURtmre not seeing a huge uproar from consumers.

Of course, some people are grumbling, but it isnaEURtmt the kind of nationwide upset we saw in 2010 and 2011, when a mix of higher gas prices, high unemployment and stagnant wages crushed demand and squeezed American families.

Gas ClimbingaEUR"But Not Peaking Yet

In part, rising wages and higher inflation outside of oil are causing Americans to be less shocked by gas prices. And while that may change, it isnaEURtmt changing now, which means demand for gas (and thus oil) is by no means going to slow down.

And thataEURtms why energy stocks are a terrific place for you to invest right now.

The Opportunity

Of the over 40 energy closed-end funds (CEFs) out there, 25 boast discounts to their net asset values (NAVs) and 11 have huge markdowns (wider than 5%).

Here they are:

Out of all these CEFs, several are appealing, for different reasons.

Take the first one I want to tell you about today: the 6.5%-yielding Adams Natural Resources Fund ( PEO ) , which has the widest discount of all these CEFs and is also one of the oldest energy funds, with a tremendous long-term total return:

PEO Has a Great History

But over the last decade, this fund has traded at about a 13.5% discount to NAV, which isnaEURtmt much different from its current pricing.

That means the discount probably wonaEURtmt close completely anytime soon. But it will likely get smalleraEUR"enough to bring the price up by around 7.1% from todayaEURtms levels, since the discount was around 10% just three years ago (and that doesnaEURtmt include any additional upside from oilaEURtms continued rise):

Smaller DiscountaEUR"and UpsideaEUR"on the Way

Since PEOaEURtms discount has been widening lately, this could be a great contrarian play for short-term gains.

That brings me to my second pickaEUR"the Cushing Energy Income Fund ( SRF ) , which is also one of the most expensive energy funds out there on a fee basisaEUR"4% expenses, compared to PEOaEURtms 0.8%. But remember, fees come out of NAV, so you wonaEURtmt get a bill for management here. Plus, this chart points to huge price upside ahead for SRF:

SRFaEURtms Mispricing Is an Opportunity

While SRF has been benefiting from the improvement in oil prices, the market seems to be ignoring that fact, resulting in SRFaEURtms total NAV return exceeding its total price return by a wideaEUR"and growingaEUR"margin.

As a result, SRFaEURtms discount has exploded from its 2.7% average over the last decade to over 14%, despite the tremendous bull run we can expect in energy, thanks to the rise in oil.

In other words, weaEURtmre talking 12.8% in capital gains just from the discount closing aloneaEUR"which you can get on top of SRFaEURtms 5.3% dividends.

4 Cash-Loaded CEFsaEUR"With Payouts Up to 7.8%aEUR"Set to Rip Higher

As IaEURtmve just shown you, a CEFaEURtms discount to NAV is a surefire indicator that itaEURtms on the launch pad for some serious price upside.

And remember that many CEFs pay dividends 3 or 4 TIMES higher than your typical stockaEUR"upwards of 8.0%! So youaEURtmre getting paid very handsomely while you wait for these fundsaEURtm discount windows to slam shut.

Right now, IaEURtmve got 4 CEFs on my radar that are ALL trading at ridiculously wide discounts to NAV. When these absurd discount windows evaporate, weaEURtmll be in line for massive 20%+ upside in the next 12 months.

HereaEURtms a quick look at each of them:

  • The real estate mogul: This fund has DOUBLED the marketaEURtms return since inceptionaEUR"including during the financial crisisaEUR"by investing in real estate, the very thing that caused the meltdown in the first place! It pays you 7.8% in cash today, and its silly discount points to a shockingly big price rise ahead.
  • The bond play with a fat 7.2% payout: This one trades at a totally unusual 14.9% discount to NAV. And it has something I love in a CEF: management with skin in the game. The team at the top includes a Wall Street vet with $250,000 of his own cash in the fund, so you can bet heaEURtmll be working for you.
  • The perfect buy for rising rates: This one holds floating-rate loans, whose rates adjust higher with interest rates. If you want to hedge your portfolio against the FedaEURtms next move (and collect 6.4% in cash while you do) this fund is for you.
  • The preferred-stock player: Preferred stocks trade around a par value, like a bond, but pay outsized dividends, fueling this fundaEURtms amazing 6.9% payout. Better yet, preferreds have gone on sale in the last few months, driving this fund to a rare discountaEUR"and giving us our in.

I canaEURtmt wait to show you all 4 of these high-powered CEFs close up. All you have to do is CLICK HERE to get the full story (names, tickers, buy-under prices and everything you need to know) right now !

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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