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Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

There's an Amazing Opportunity to Double Your Money in Oil Stocks

Commodities / Oil Companies Apr 14, 2009 - 03:18 PM GMT

By: DailyWealth

Commodities Best Financial Markets Analysis ArticleMatt Badiali writes: Around this time last year, I was talking oil and gas investing into a big, smelly microphone.

A friend had lined up the interview for a local radio show in Abilene, Texas. I'm not sure who was in the hot seat before me, but he must be a big fan of Skoal


Just months later, Fox Business News wheeled me onto the newsroom set of its Vancouver affiliate to talk about the giant Marcellus Shale gas field. That's what its viewers wanted...

After all, investing in oil and gas was "fun" back then. West Texas Intermediate climbed from $90 a barrel to $140 a barrel in just six months. Everybody was making money. T. Boone Pickens was everywhere as the "billion-dollar man." But the market likes to punish as many people as possible, so you know what happened next...

Oil has since suffered one of the most severe drops in its history. Many oil stocks are down 75% from their highs. I hope you took my advice last year by taking profits where you had them and losses when they were small. I hope you now sit at the table for the next hand. I think it's going to be a doozy...

Oil is the quintessential cyclical market. The price of oil moves in a series of peaks and valleys. When it peaks, everyone enjoys the boom times. When it hits a valley, it feels like a killing field. And as I said, we've just had a meteoric fall from a historic peak.

The shares of oil-service stocks follow the same pattern of peaks and valleys... only more so. Oil services are the companies that perform drilling, pumping, transportation, and other ancillary services for large oil companies. As the price of oil cycles up and down, the shares of oil-service stocks follow along. Except oil-service stocks' cycles are more exaggerated in their gyrations. If oil prices are the whip handle, oil-service stocks are the tail.

The table below shows how the price to book value of these companies goes through huge boom and bust cycles. When oil stocks are booming, investors are willing to pay 4-5 times book value for them. When oil stocks are busting, investors will pay 1.5 times book value for them. After last year's, crash, oil services are the cheapest they've been in 20 years:


Here's the exciting part: You make gigantic returns when you buy these companies cheap and wait for the inevitable boom that follows.

Look at this simple summary of the past 10 cycles. I identify each of the peaks. Look at the gains you would have made if you had bought in during the preceding bottom.

Peak

Market Bottom

Investment Period

Oil Service Gain

Oil Price Gain

1
Mar 1980
8 months 96% 21%
2
Sept 1982
11 months 325% 14%
3
Dec 1985
19 months 133% 92%
4
Nov 1987
30 months 114% 147%
5
Jan 1995
33 months 184% 63%
6
Feb 1999
18 months 116% 171%
7
Sept 2002
27 months 45% 141%
8
Apr 2005
12 months 54% 50%
9
Feb 2007
7 months 40% 67%
10
Jan 2008
5 months 43% 67%

I know investing in oil services sounds crazy right now. Oil prices are depressed and earnings have fallen off a cliff. It's a hard trade to make. But in a boom and bust sector like oil services, the "hard trades" are the ones that make you rich.

Good investing,

Matt

http://www.dailywealth.com

The DailyWealth Investment Philosophy: In a nutshell, my investment philosophy is this: Buy things of extraordinary value at a time when nobody else wants them. Then sell when people are willing to pay any price. You see, at DailyWealth, we believe most investors take way too much risk. Our mission is to show you how to avoid risky investments, and how to avoid what the average investor is doing. I believe that you can make a lot of money – and do it safely – by simply doing the opposite of what is most popular.

Customer Service: 1-888-261-2693 – Copyright 2009 Stansberry & Associates Investment Research. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Stansberry & Associates Investment Research, LLC. 1217 Saint Paul Street, Baltimore MD 21202

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Daily Wealth Archive

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