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There's an Amazing Opportunity to Double Your Money in Oil StocksBy
Wednesday, April 8, 2009
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 yearby 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.
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
Further Reading:
The Key to Making Money in Oil Stocks This Year... Market NotesAN INCREDIBLE MOVE FOR DR. COPPER
Incredible news from our friend Dr. Copper: Things are getting "less and less bad."
You might recall that we carefully track the price of copper for one major reason: It's in practically everything around you... from cars and condos to power lines and plumbing. This "in everything" quality makes it rise and fall with global economic health. Copper was slammed to a bottom around $1.30 per pound last December. But as we detailed last month, the metal is now steadily rising in the face of horrid economic news. It's incredibly bullish if an asset climbs higher when newspapers and the crowd says it "shouldn't." The latest news from copper is that it just reached its highest point since October. It's a bullish sign for the economy as a whole. We think it's likely stock and commodity prices will get "less bad" in 2009, but if the market tells us otherwise, we have to mind its message. It's the judge, jury, and executioner of all ideas. As you can see from today's chart of copper, the market is saying, "Yes, things are getting less bad... and I'm pushing copper a little higher this week." |
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