Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Three Reasons to Invest in Oil Stocks Now

Companies / Oil Companies Jan 07, 2015 - 03:45 PM GMT

By: Investment_U

Companies

Marc Lichtenfeld writes: After trading north of $90 since June 2012, the price of oil has crashed, falling more than 50% from its high this summer and dipping below $50 per barrel Monday.

Nearly every pundit out there is declaring low oil prices are here to stay. With the glut of oil being produced by OPEC and the U.S., the days of $90 oil are over, they claim.


But, always a contrarian, I suspect oil prices may surprise people and move higher in 2015, which is why I love the big integrated oil companies - and their dividends - right now.

What Will Push Oil Prices Higher

On the first day of Economics 101, you learn about supply and demand. When supply outstrips demand, prices fall. And that’s exactly what is happening in the oil markets.

The United States and the OPEC countries are producing more oil than the world needs, particularly with Europe still struggling and China slowing down.

As a result, it’s tough to find any expert who believes prices are going higher or oil stocks are a good buy.

Here’s why I think they are wrong:

  • Crises happen - In 1978 there was an oil glut. Then a revolution took place in Iran and the price of oil doubled. Considering that the Middle East isn’t exactly a model of stability and Vladimir Putin is likely to roll more tanks across the borders of former Soviet republics, there is a decent chance some crisis will occur that pushes oil higher.
  • Free markets work- Rick Rule, founder and chairman of Sprott Global Resources Investments Ltd., has a great quote: "Markets always work; the cure for high prices are high prices, the cure for low prices are low prices, each is the author of the other."In other words, when prices get out of whack, the market stabilizes. When prices are too high, demand falls off and prices decline. When prices are too low, demand increases and so does the price.Oxford Club Energy and Infrastructure Strategist David Fessler agrees. In his words: “Lower prices means more drillers will stop drilling. This will eventually cause the supply surplus to dry up. Remember, we’re only talking about 1 million to 2 million barrel per day surplus over demand. Once that happens, prices will do a quick U-turn. I think it’s going to happen in the next six months or less.”
  • Being contrarian works - Contrarian investing is investing against the conventional wisdom. One reason it works is that the crowd is often wrong. But the other important reason is that when you are a contrarian, you are buying what everyone else is selling and selling what everyone else is buying.

Going back to our Econ 101 class, if everyone is selling a stock, that means you get to buy it cheap. And if the crowd is buying a stock, you sell it when prices are high.

What You Should Buy

The thing about contrarian investing is you sometimes have to be patient. The crowd usually isn’t proven wrong the week after you buy a stock. Contrarian themes can take months (or longer) to develop. At the same time, you don’t want to be in stocks that post huge losses while you wait for things to turn around.

For that reason, I’d avoid the smaller oil producers and services companies - particularly those with a lot of debt on their balance sheets. As companies receive less dollars for their oil and the oil companies spend less on services, the businesses with high debt levels may have a tough time servicing their debt, which could require a dilutive equity offering.

If they have to cut their dividends, the stock price will get hammered as we saw recently with Seadrill Ltd. (NYSE: SDRL) and Civeo (NYSE: CVEO). (For more on the Civeo story, check out my latest article  for Wealthy Retirement.)

The big integrated oil companies appear much safer. Stocks such as Chevron (NYSE: CVX), Exxon Mobil (NYSE: XOM) and ConocoPhillips (NYSE: COP) have solid balance sheets and experienced management teams who are not going through this type of market for the first time.

Additionally, they pay solid dividends that can help investors stay patient while they wait for a turnaround in the oil market. Chevron and ConocoPhillips both pay over 4% yields. And all three of the companies I just mentioned trade at a price-to-earnings (P/E) ratio ranging from 9 to 11. Meanwhile the S&P 500 trades at over 18 times earnings.

These stocks are cheap, pay a healthy dividend yield and this is a great opportunity to buy low.

You can either follow the masses into the “oil is never going higher” camp or you can look at years of economic history and crowd psychology and decide, like me, that this huge sell-off presents us with a unique opportunity to buy low... and get paid to do it.

Good investing,

Marc

Source: http://www.investmentu.com/article/detail/42498/contrarian-investing-three-reasons-invest-oil-stocks#.VK19TU1ya0k

http://www.investmentu.com

Copyright © 1999 - 2014 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in