In this week’s Stock Market Video, Mike Cintolo says that his intermediate-term indicators have turned down, which tell him the post-September rally is likely over and it's time to be cautious. On the flip side, most of his favorite liquid leading growth stocks are holding up well, and some growth sectors that already suffered big declines in 2015 are also performing admirably. All in all, Mike's holding some cash, but also holding resilient stocks, while mostly waiting patiently for the bulls to show up. Click below to watch the video.
How to Make Money in Oil Stocks
The Fed’s extremely patient decision-making process has been both the biggest story of 2015 … and the biggest non-story. By Wednesday, when the guardians of the health of the U.S. economy finally lifted rates off zero after seven years—seven years!—the market was ready to be interested in something else. After a little “jump for happy” rally on the day of the rate hike announcement, U.S. markets fell back down the ladder on Thursday and Friday.
My bet is that the biggest question on the minds of growth investors right now (except for the Great Apple Conundrum of what’s going to happen to AAPL) is the price of a barrel of crude oil.
This is no small matter. Despite the welcome increase in solar and wind generation of electricity, most of us power our daily commutes with oil by-products. And the lower price of gasoline has caused a rebound in the sales of gas-guzzling SUVs. (I’m a little disappointed in the “If the earth is going to die, I want to be driving a bigger car” crowd, but let that go.) Oil is still the fuel of choice for industrial economies, and will be for quite a while, despite the Paris accords.
There are lots of reasons given for the low price of oil, but the main one is that Saudi Arabia unilaterally increased its production, creating a global surplus. The simplest explanation for that decision (and I haven’t actually talked to the Saudis about this) is that it was an attempt to discourage the runaway program of drilling and fracking that was pumping out oceans of oil and natural gas from U.S. shale beds.
To some extent, this has worked. Many explorer/drillers have curtailed operations or quit, driving unemployment higher in North Dakota and elsewhere.
But it certainly hasn’t worked well enough to get supply back under control, and when news broke that U.S. oil reserves were at 42-year highs, oil prices took another hit.
Crude prices are now down to around $36 a barrel, compared to $57.81 a year ago. Here’s a chart showing the drop in price from the middle of 2014.
Price forecasts for crude are all over the place. Just today I’ve seen stories on how (and why) crude will drop to $20 per barrel and others on why oil will cost $100 a barrel within a year. So it’s safe to say that nobody knows what will happen to oil.
Just as an illustration of how hard it is to predict prices, I have a little story. On October 9, Mike Cintolo, our resident growth guru (and not a man given to crystal ball gazing) looked at two popular oil ETFs—Market Vectors Oil Services ETF (OIH) and SPDR S&P Oil & Gas Production ETF (XOP) and predicted that they would be up 30% by the end of the year.
A quick look at the chart for XOP will show why he thought so.
XOP peaked at 82 in late June 2014 and slid to 42, almost a 50% drop, by the middle of December. A recovery to 56 in mid-April 2015 dissolved in May into another steep slide to a possible double bottom in late August and late September.
So, when Mike made his prediction, XOP had just rallied from 32 at the end of September to 41 on October 8, and trading volume had been ramping up for seven days.
Now, all of us in the office like to guess the future now and then. But we do just that—we guess. No money or recommendations was involved, but I wrote down this prediction on a Post-It note: “October 9. OIH at 31.8, XOP at 40.8. Mike predicts up 30% by year-end.”
Long story short, OIH is now trading at 26.7 and XOP is at 29.7. Both have been correcting steeply since December began. These harmless paper-trading exercises often help to reinforce rule we already know. Specifically, the first way to make money in oil stocks is not to invest in the price of oil. You may think it can’t go any lower, but the market specializes in making predictions expensive.
The second way to make money in oil stocks is to look for companies in the oil patch that are continuing to do well under the present pricing conditions.
I’m thinking of Valero Energy (VLO), a refiner and retailer of oil products whose stock nosed out to all-time highs in late November. There’s also Tesoro Corp. (TSO), a refiner/distributor that has taken a little haircut since hitting new all-time highs late last month but is back to its 50-day. Refiners are boosted by low prices for their feedstock.
As always, when opinions and predictions are telling conflicting stories, the charts will tell you the truth, even when predictions fail. And I guess the third way to make money is to enjoy gasoline selling below $2.00 a gallon. It probably won’t last, but it certainly makes holiday spending a little easier.
---Here's this week's Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
Tim’s comment: Implied in this, happily, is the notion that the better we get at “calculating,” the less frequent and severe our wars will be—and in fact, that is what the trends reveal.
Paul’s comment: That’s not to say that the wars we have are any less tragic or distressing than those of the past, but it’s a genuine comfort to know that their global toll has been steadily declining. And if that doesn’t sound like a particularly cheery holiday message, I’d say that a year when a Fed rate increase is one of the best pieces of news isn’t going to go down in history as a particularly cheery one. And in that kind of year, you take what comfort you can. That’s probably why Tim picked this particular quote to comment on. Let’s hope we’re all cheerier in 2016.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Cabot Stock of the Month’s Tim Lutts looks at Apple, which looks better from a value perspective than as growth stock. But Tim’s too savvy to take sides. He also considers whether Chipotle Mexican Grill (CMG) is a good bet to rebound from its troubles. Stocks discussed: Apple (AAPL) and Chipotle Mexican Grill (CMG).
Chloe Lutts Jensen, Chief Analyst of Cabot Dividend Investor, forecasts low oil prices and interest rates in 2016, “missing” inflation and spending driven by the millennial generation (bad news for bricks-and-mortar stores; better news for online retailers).
Chief Analyst Roy Ward, whose Cabot Benjamin Graham Value Investor covers the value side of things, gets in the holiday spirit by giving away five of his top value picks for next year. (You have to email him to get the other five). Stocks discussed: BJ’s Restaurants (BJRI), Dollar General (DG), General Motors (GM), Prudential Financial (PRU) and Whirlpool (WHR).
Have a great weekend,
Chief Analyst of Cabot Emerging Markets Investor and
Editor of Cabot Wealth Advisory