A 50% decline in the price of WTI crude over the past three months without any fundamental change from what has/had occurred throughout the first half of the year, and the extreme selloffs in many energy stocks and other stocks with peripheral association to oil is a gift from the gods. In any given 1-2 year period there is a stock market black swan event that is totally unexpected and unrelated to the fundamentals. Rather, it is an emotion-driven event that takes on a life of its own, overshooting to the upside or downside. This is an extraordinary investing opportunity and you should have already made your Xmas shopping list and be averaging into the best of the stocks and ETFs that have been decimated.
Examples:
1. Mid and small cap energy stocks: WLL, OAS, CXO, CLR. These are NOT stocks with extraordinary debt or leverage within their sector and they have declined between 50% to 70% in just 3-4 months. WLL already trades well below book value.
2. ETFs: energy exploration & production (PXE, PXI).
MLPs (MLPI, MLPX)
3. MLPs: EPD, MMP, PAA, WPZ. These are companies that transport oil or natural gas and are involved in various aspects of the energy infrastructure. A high percentage of their revenues come from long-term, fee-based contracts with built-in price escalators. They will get paid regardless of the price of WTI crude and the energy demand in the US shows little sign of abating. The U.S. is not in a recession nor does anyone really see one on the horizon based upon recent employment data, retail sales figures, corporate profits, etc., These stocks have sold off about 20% in three months and they pay dividends between 4% to 8% (WPZ).
4. GLOG (GasLog): Off nearly 50% from its high this year, price:book ratio of 1.5 and a nearly 3% dividend. This stock is involved in liquid natural gas cargo transport and the price of WTI crude should not logically result in a loss of 50% NAV. Do you really think the demand for inexpensive natural gas by emerging market countries and European countries that are totally dependent upon imports for their energy needs will evaporate for the remainder of the decade??
5. Transports: Specifically, the railroad stocks: GBX, TRN, CP, CNI. Railroad stocks with ANY exposure to transport of oil have also been dragged down, even if oil transport makes up a small fraction of their total business.
6. Chemical stocks: WLK, LYB. Both stocks are involved in oil refining and production of gasoline additives although this is not a majority of their businesses. Both have lost 45% in the past three months and LYB sports a dividend approaching 4%.
I could go on but the point is obvious: if you are not slowly buying ETFs and top quality stocks that are now on sale by averaging in you need to ask yourself what you are waiting for. Are you the same "investor(s)" that would not buy stocks or ETFs in March 2009 after the S&P 500 had lost 55% of its value because you were waiting for it to decline another 20% ?? Because the CNBC "experts" said the S&P 500 was going to decline to 400 or 500 and the world's financial system was going to collapse and vaporize??
FWIW, I am slowly buying into many of the above names with the understanding and expectation that my initial positions will lose between 5% to 25% over the next month or two. However, that is why one slowly scales into a position. When the turn does come it will literally happen overnight and these stocks will gain 5% to 10% a day for several consecutive days and then you will say that you've missed the turn and it is too late to get in.
These are not dot.com stocks or biotech stocks with promising Phase I or Phase II trials for a single drug. These are established, well run businesses with very real assets and earnings. You will not catch the precise bottom but 2 or 3 years from now these will be very profitable investments and you will ask yourself why you missed this investing opportunity.
Comments
Thanks for that comment @DiphcOracl.
Have a great weekend, Derf
I'll also toss in PAGP as an non k-1 alternative to PAA. In terms of MLPs, I own EPD and ETE, both of which offer discounts on reinvested divs. I also own MLP-like Canadian co IPPLF, which also offers a small DRIP discount.
I'll also throw in the commodities exchanges as a long-term holding. ICE has done well through this period.
So, there may be a bounce, before continued decline.
"Don't try to catch a falling knife." Dex
1. I cannot say or recommend what you should do with regard to buying individual stocks because I do not know how it fits in with your current investment portfolio and temperament. You certainly can purchase or average into some of the ETFs or ETNs that have been beaten down and increase your exposure to the energy sector.
2. Regarding your MF managers: Your MF managers SHOULD be looking for bargains and unjustly beaten down stocks and scaling into them . However, most will act as if they are "deer caught in the headlights" and do nothing until well after the fact because they are seeking a false "margin of safety". AFTER these stocks have bounced back and gained 25% to 50% in a few months they will THEN have their security blankets and begin nibbling. How can you tell which of your MFs have managers that are investors or deer?
Very simple. Take each MF you have and look it up on Morningstar (M*). Click on "Performance" and then click on "Expanded View". This will show your fund's performance year-by-year for the past ten years. Now, go to the year 2009, which is when the bear market ended and the market reversed violently to the upside, and see how your MF did compared to its peers, i.e., compared to the average for its M* sector. If your fund did not outperform its peers in 2009 then its manager was asleep at the switch or frozen with fear and did not buy stocks when they were extreme bargains.
As an example: WSCVX (Walthausen SC Value fund) returned 42.39% in 2009 compared to the M* SCV average of 31.32% in 2009. Clearly, Walthausen scooped up value stocks and the fund lived up to its name. OAKLX (Oakmark Select) is another example of a fund whose manager, Bill Nygren, bought aggressively at the bottom, returning 52.46% versus the LC blend average of 24.29% for that year.
It's very hard to time incremental purchases going down. Tendancy is to buy too early, than to throw good money after bad, than to get frustrated and bail at a loss before rewards are realized.
However, rewards can be phenomenal if one gets it right.
Delphi - I've been doing what you recommend with the "play money" segment of my portfolio (less than 30% of total assets). And it hurts. I believe that 3 or 4 years from now I'll be pleased with the results. However, that's not for certain. Get into a serious deflationary spiral and all bets are off.
I didn't think that the concerns would quite lead to this end result, but I do think that:
A. You still stay away from small, aggressive and over-leveraged. Oil feels like it has no bid and it could easily continue lower. If it does, you are already seeing distressed debt for smaller companies. You have $550B in energy debt and many of those companies weren't making money - now they REALLY aren't. There are values already for those with a longer-term time horizon, but I'd really stay with the more mid-to-large players and away from the speculative, smaller, highly indebted ones.
B. There are companies that are not oil companies that have gotten hit because of this. Railroads are down. Obviously, oil by rail is a big story, but railroads aren't going anywhere and oil certainly isn't the majority of what these railroads are carrying.
C. The pipelines have gotten hit but they are not price-sensitive, they are volume sensitive. Many of the pipeline companies that I follow have been positive - Interpipeline (IPPLF) had a great quarter and raised the dividend. Doesn't matter, stock still gets obliterated.
"Oil's lost 50% this year. Next year it can still lose another 50% .... and another 50% on top of that if it wants to."
If that happens, what does the market as a whole do, as that's saying something considerably worse than mere oversupply issues.
My point was more that percentage numbers can be deceiving. From a purely mathematical perspective, there's always another 100% left.
I liked Bill Gross's comments on Bloomberg Friday. In effect - the Fed appears to have their heads in the sand (my words - not his) on this deflation question.
Added rambling: There would seem to be strategic opportunities in all the service industries you cite for a good fund manager to make you some money if you have time to wait. I'm optimistic and will increase my allocation to the broadly diversified natural resource sector as we near $50 and $40. On the other hand, these funds will be facing enormous outflows as investors panic and flee. So, it will be a little harder for even the best managers to turn their funds around.
1. Bill Gross has been "right" about very little for several years. Not the guru I would take my investing lead from.
2. A 50% drop in NAV is not important in and of itself. However, when it results in a well-managed stock with clearly defined assets trading at or below its book value, it's called an "investing opportunity". If you do not invest under these circumstances, then "when" ??
3. Do not depend upon an MF manager to make the difficult investment decisions for you. Very few have the cajones to invest when good stocks are on sale and are no more likely to do so than you are. Look above at my reply to Derf and see how most MFs did in 2009. Whether or not they beat their bogey, i.e., their sector peer group average, in 2009 will separate the MF manager wheat from the chaff.
I have been dollar averaging into both an oil heavy commodities fund (QRAAX) and an energy heavy NR fund (PRNEX) for a couple of months now. I've actually taken some heat on this board for trying to catch a "falling knife" to the point that I won't even respond to Scott's "What are you buying ... selling..." threads any more.
The point I wanted to make above is that "buying down" is not an easy proposition. It's not the "no-brainer" you seem to imply. It's definitely not for everyone. Sorry if I ruffeled your feathers. No intent to do so.
Gross was commenting on recent Fed Governors' statements. That's all.
If he was dispensing any investing advice, I missed it.
BTW: Here's what you had to say about oil prices in Scott's thread on September 23: "The price of crude (WTI) may go a bit lower but not much - perhaps a few dollars..." http://www.mutualfundobserver.com/discuss/discussion/comment/47977/#Comment_47977
In fact, the price of WTI has fallen from around $91 on September 23 to $58 today.
http://www.traditionenergy.com/morning-energy-report/morning-energy-report-september-23-2014
Hank, I totally agree with your statement, . You really have to be committed to the likelihood of losing more, maybe much more, before you (inevitably?) benefit. In comparing the 2 strategies, buying down or buying up, I have lost most of the time with buying that falling knife. But that's me. You and guys like Delph are likely to win with patience.
Oil co's are big profit machines that pay big dividends on a "necessary" product, with shares being sold at reasonable/good P/E s
1+1+1+1 ( + my Profit)=5stars in Tampabay
1. I was not implying that investing under these circumstances is a "no-brainer" - it never is. However, I AM saying that investing in sound, well-managed companies at the present time greatly shifts the odds in one's favor. That is all one can do, especially in buying individual stocks. MFs and ETFs are, to some extent, a different story.
2. Regarding Bill Gross: I have simply tuned him and Mohammed El-Erian out. They talk too much and say too little. I have never heard anything from either one that was investable or made any money for me.
3. Regarding my post of September 23 - I was flat out wrong and I lost money on those investments. As posted, I did indeed proceed to average into several energy stocks and complete those positions. However, ALL of them got stopped out when then hit -10% of my average NAV after I had completed those positions. I never dreamed that:
a. the price of WTI crude would drop this far this fast and certainly did not guess that it would drop below $60. I believe the gurus that believe it may fall to $50-$51 are credible whereas those calling for $40 oil are not.
b. Whiting Petroleum (WLL) would lose 70% of its value in three months and now trade at a price:book ratio of 0.8 or that CLR would lose 60% of its value.
c. Well diversified stocks with peripheral association with oil and energy would also sell off as much as they have, e.g. WLK, LYB, GBX, CP, TRN (although TRN has other issues as well). I cannot believe that buying a large-cap leader such as LYB with a dividend yield of 3.8% and price:book of 3.8 when it has lost 40% in three months will not be profitable in 2-3 years.
One final point: I share your disdain for the "don't catch a falling knife", i.e., don't invest as stocks are rapidly losing value, canard. It is the antithesis of "buy low, sell high" and it make little investing sense. If one uses it to mean "don't back up the truck and buy aggressively" in the midst of a steep decline, I agree. If it is used to say "don't invest when the stock market or a stock is going down, I disagree. At some point, one has to use his/her own best judgment and decide when a stock, MF or ETF has reached a value that makes it worth owning if one has a time horizon of years, not months, and slowly average into a position. It isn't foolproof but investing never is.
What strikes me is how fast it dropped. During the 1980 oil bust, which turned Houston into a ghost town, I believe the 70% decline took six years ($33/barrel in 1980 to $10 in 1986) ... this time we're almost there in just three months!
Here's a recent article related to Scott's energy debt posts...from the Houston Chronicle no less:
Memories of '80s oil bust keep bank regulators vigilant
I ask: So if you had your stop at -10% then, I can only assume that you're using a similar stop now. If oil drops to $50, won't you be stopped out of all your positions well before that point? Or are you not using stops at this (low?) level?
Interesting to see that oil has never recovered to pre-financial crisis levels...we remain in the same drawdown, 78 months and counting...
Here's plot of data from Energy Info Administration:
To me that is the most important segment of this thread.
Have a good weekend, Derf
Oil Stocks: A Real-Time Case Study in Value Investing
EXACTLY..you can lose any amount of money you want at anytime, Keeping the Profit(s) you WANTED is real expertise
linter: When I bought those energy stocks in September it was for a ST to intermediate term "swing trade". I did not perceive that the energy stocks were in the midst of a bear market and I did not have any conviction that these were compelling stock values. Rather, I still thought the energy sector was in a bull market, as was/is the rest of the stock market, and that this was a correction that would quickly reverse itself. Wrong !!
My reason for putting 10% stocks underneath all of those positions once they had been completed is because I am, as most of you are, an amateur investor and I do not have inside knowledge or an "edge". It is a counter to my hubris that I "cannot possibly be wrong" and it gets me out of ST/IT trades when it becomes apparent that there is something else at work that I do not see or understand. That said, investing at current levels is an entirely different matter and whether I employ a stop is now stock and investment specific.
For example, Oasis Petroleum is a SC stock that has lost over 80% (yikes!!) of its value in six months and now has a price:book ratio of .66 and a PEG or .17. However, it is also has a VERY high debt level and I believe the steep selloff in this stock represents concerns about its solvency and profitability in the near future. I WILL place a 10% stop loss underneath this stock once I have finished averaging in because this is a highly speculative position. Conversely, Whiting Petroleum (WLL) has lost 70% in three months and has a price:book value of .66. However, it has a market cap of nearly 4 billion dollars and has been a very well managed company. Morningstar's energy analyst (and I always find M* to be overly conservative in its stock evaluations) believes in its most recent report of 12/02/2014 that the fair value of WLL based on its holdings is $84 per share. I will NOT put a stop under WLL because I do not foresee a situation where it could go to zero. I am prepared to ride this one out for 3-5 years. I feel similarly about investments in LYB, CP, and several of the high quality MLPs with high, safe dividends (WPZ, OKS, EPD, etc.)
MikeM: I agree with your points regarding usage of stops and hope I have clarified how I intend to use them this go-around in my reply to "linter". The majority of positions I am averaging into are stocks, ETFs (MLPI, PXI), and MLPs that I believe are high quality investments that are compelling LT holds and they will not have 10% stop-loss orders placed underneath them. My investing horizon for these positions is LT, i.e., 3-5 years. The few highly speculative "swing-for-the-fences" positions such as OAS will be stop-loss protected.
Derf: No one really knows where the price of WTI crude will bottom but one has to make an educated guess. Two of the most well-respected figures in the energy industry, both with many decades of experience and billions of dollars of skin in the game, are Boone Pickens and Harold Hamm (CEO of Continental Resources/CLR) and both thought it would bottom at around $60. Clearly, both have been proven wrong. CNBC's Dennis Gartman and the staff writer for Barron's (Gene Epstein) believe it could settle at $30-$40 per barrel. I'm placing my bets with Pickens and Hamm and investing accordingly.
One last word to frame this discussion and put it in perspective - these investments in beaten down energy stocks and peripheral stocks dragged down with them (chemical & railroad stocks), ETFs and MLPs will, in total, make up no more than 10% of my entire portfolio. The vast majority of my portfolio is held in ETFs and MFs that I do not trade in and out of. This is Madd Money, i.e. a cash position of 10% to 15% that I intermittently hold for employing into unforeseen investment opportunities. As stated above, every year or two one of these opportunities comes out of nowhere. It is an attempt to "juice" my overall portfolio. Any and all comments and criticisms are welcomed. This is still a learning experience for me, as well.
You mention CP. I own CNI and CP as two of my top investments and personally, I don't even think about them on a day-to-day basis.
If you asked me to mention stocks that I would feel comfortable holding for a few years, I could offer a lot of names. If you asked me names that I would feel comfortable holding for 5-10, there would be less. If you asked me for names that I can strongly imagine holding for 20-30+ years, it would be a short list and railroads would be at the top of it.
EPD (and ETE) I don't think about on a day-to-day and I just reinvest dividends (with the added 5% DRIP discount.)
CLR is really interesting, but I think my problem with this drop in oil is that it's effected things that I own beyond the oil-related (look at Ecolab/ECL, which is primarily a hygiene company, but because an aspect of their business is related to fracking, that's taken a hit. Ecolab's largest shareholder is Bill Gates and the company has raised the dividend I believe every year for something like nearly 30 years.
So, for me, it becomes difficult to add something like CLR. I say that now though, and maybe in a few days it winds up at a price I can't resist. Who knows.
LYB is something I've explored not much beyond the surface, but I think the first thing that I thought of was, "Well, isn't what they make their product from now cheaper?" I guess the issue becomes:
"LyondellBasell may be a producer of ethylene, but it has been one of the biggest beneficiaries of the U.S. shale revolution. It has converted much of its U.S. chemicals facilities to run on natural gas feedstock, specifically ethane, that is cheap and abundant thanks to new fracking techniques. That has given LyondellBasell and other U.S. chemicals producers like Westlake Chemical a huge advantage over foreign companies that use oil-based naphtha as a feedstock. Now that Saudi Arabia has cut prices for U.S. oil exports and Brent crude has hit a four-year low, the so-called ethane advantage has shrunk considerably."
http://www.forbes.com/sites/nathanvardi/2014/11/04/billionaire-len-blavatniks-lyondellbasell-trade-looks-a-little-less-great-after-oil-price-drop/?partner=yahootix
I think the LYB situation could certainly turn around within a reasonable time frame. The advantage that they have has shrunk, but the feedstock for the product they make is only now cheaper, so I suppose I'm questioning the decline in the stock, which seems overdone for the reason above.
I really enjoyed reading your well thought out and written blurb. I am not sure what the best strategy is try to catch a falling knife, so to speak, or trying to pick a bottom. Here is how I do it. Basically, there are eleven broad sectors in Morningstar Instant Xray analysis. I break these into major and minor sectors with energy being a major. On an even distribution basis each sector would carry about a 9% weighting. I strive to hold at least a five percent allocation in a minor sector (like materials) and ten percent in a major sector (like energy). Thus far, this has worked well as it has kept me form becoming underweight in a sector when it moves from an in vogue sector to an out of favor sector. Currently, I am also holding a little better than a five percent allocation in the materials sector.
By keeping at least ten percent of my allocation to energy … Well, when it becomes an in favor sector once again then I will have some good upward momentum movement within my portfolio. And, the ten percent allocation could grow upwards to about fifteen percent through capital appreciation and perhaps a little buying on the rebound.
Not saying what I do is right for everyone; but, this is just how I do it.
My best to you and yours,
Old_Skeet
Ended up sitting next to a couple that came in from Texas, big fans of the winery and area. Each had retired from major global oil companies after 31 years in the biz. One oversaw development projects world wide. Another worked the oil futures trading deck.
Anyway, they inherited a ranch recently and are learning to herd cattle. We discussed the current rapid decline in oil prices and of course they took it in stride. "Oil's not going away." They believed the demand will continue to rise and this down turn will be rather short lived, perhaps a year or two.
"Have you every herded cattle?" one asked. "It just takes one cow to start running in any direction and all the rest follow... Oil pricing is a very emotional business."