Monday, March 7, 2011

Why You Don't Need More Energy Stocks

Energy stocks from integrated (COPCVX), to pure exploration and production (APADVN), along with the oil-services stocks (SLBRIG) are getting a lot of attention these days.

From this Wall Street Journal article written by Jason Zweig:

Wall Street Journal: That's Oil Folks, Why You Don't Need More in Your Portfolio

The article points out the price of oil has tended to go down adjusted for inflation over the long haul and argues against oil-related stocks.

Nothing wrong with holding some energy stocks but buying any stock that's already in the headlines usually means there is already some kind of premium in the price. It may be a trade but no way to invest for the long run in my view. You've got to buy good businesses when the are out of favor due of some short-to-intermediate term yet very real problem(s).

Now, this buying-what's-unloved approach generally means the stock in the near term behaves poorly against the market as a whole (umm, in the near term can be years by the way...patience required). With discipline and the right tools, figuring out how market price of  a good business compares to approximate intrinsic value isn't all that hard to do. Timing when the gap between the market price and intrinsic value will close is nearly impossible.

That it will close is an easy call. When it will close is not.

That'll drive some investors crazy as they see whatever is hot at the time going up while the supposedly wise contrarian investment underperforms.

The impulse to buy what others are currently making money in (chasing price action vs buying productive assets below intrinsic value) is precisely what got Isaac Newton in trouble during the South Sea Bubble.

I understand the desire to try and jump into what is hot at just the right time. In trying to do that the investor adds a new risk: that the chance to own a good business at a depressed price will pass.

When something like previously unloved ConocoPhillips was selling in the $ 40-50/share range was the time to accumulate shares. Conoco has been on the Stocks To Watch as something I'd buy at or below $ 50/share since July 2009 (the day I put Conoco on that list it was selling at $ 43.50/share). I still hold some of the shares bought back then but at nearly $ 80/share and in the current environment it's no longer an obvious bargain.

So while many energy stocks do not look terribly expensive (and could very well go up from here) there's no longer enough margin of safety for my taste at current prices.

Adam

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