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The Key to Making Money in Oil Stocks This Year...

By Matt Badiali, editor, S&A Resource Report
Thursday, April 17, 2008

Is to sell 'em.
 
But before you decide I'm committing professional suicide, realize that selling is how you realize profits in any stock, aside from blue chips you plan on keeping forever.
 
Selling sounds easy... but I know the majority of investors get way too attached to their stock holdings... both the winners AND the losers. They'll hold a stock for years as if it's part of the family. And oil stocks have done so well for the past few years, they almost deserve a place on the living-room mantle...
 
I've recommended 38 stocks in my monthly S&A Oil Report since I began writing it in October 2005. To keep it simple, we employed 25% trailing stops. Out of the 19 stocks we stopped out of, 10 were gains and six were double-digit gains. The trailing stops allowed us to exit our positions with our profits intact, rather than ride the stock back down below our purchase price. Out of the 19 stocks we're still in, 15 of them show gains.
 
The math works out to a 66% success rate. Now for the scary part... 84% of those gains are double digit or better.
 
That's a bull market.
 
I'm not talking about little companies either. Many are goliaths of the industry, with a billion dollars or more in market value. One of our biggest winners, Petrobras, is up 160% in just the past 14 months. My February recommendation went up 35% in just two weeks.
 
I'd love to tell you that, yes, I'm smarter than the market. Naturally, I'd like to think the research I've done has helped readers make bigger gains than the average investor. But when you get the big trend right and swim with the current, it's relatively easy to make big returns.
 
In other words, I'm not going to confuse brains with a bull market.
 
Experience tells us to keep this all in perspective. I have a good friend who made a bundle in the tech boom in the late 90s... and started to think he was bulletproof. He gave all the money back during the crash because he refused to sell. He's now an investor-relations officer for a small public company, and learned an expensive lesson.
 
"I never saw the end coming," he told me. "In fact I averaged down on several companies and lost my shirt."
 
My friend could have kept a big chunk of money by keeping just two things in mind:
 
1. Don't get overconfident in your ability as an investor. Don't let big returns go to your head and prevent you from admitting mistakes. And...
 
2. Make sure to ride any boom with one eye on your trailing stops. (Steve recently wrote a great summary of how these work, which you can read here.)
 
Please realize... I'm not telling you to sell all of your oil stocks right now... just alerting you to a potential danger down the road.
 
If you're hesitant to sell a stock after it hits your trailing stop or even starts a downtrend, remember folks who held their Internet stocks for years. I don't think an Internet-style blowup will happen to the oil market, but even the strongest uptrends have shakeouts along the way. You can't know how severe they'll be, so you simply have to stick to your plan, take your profits, and move on.
 
So... for those of you out there who have made huge returns in oil stocks over the past few years, enjoy the ride. It could very well keep going for years, and it could run hundreds of percent higher. But keep today's essay in mind, and you'll make money whatever happens.
 
Good investing,
 
Matt Badiali

Market Notes


THE MARKET FOR FERTILIZER STOCKS HAS GONE CRAZY

The agriculture boom we predicted several years ago has finally entered "stupid" mode...

We still think the trend of higher agricultural prices (and higher share prices for "ag" companies) will last for a long time. But like all big booms, the bull market in food has produced an overheated market... namely in the companies that produce the critical component of modern agriculture: fertilizer.

The big names here – CF Industries, Mosaic, PotashCorp, and Agrium – have doubled in just months. They now trade for 40-60 times earnings... and their shares are leaping higher nearly every day. A momentum-driven public is trading with the rosiest possible future in mind. Even local papers in places like Medford, Hagerstown, and St. Augustine are headlining runaway grain prices. Nearly all "overbought" indicators are flashing red.

For anyone watching fertilizer stocks... now is not the time to buy. It's time to unload your shares on the latecomers, who are just now deciding to buy after seeing the headlines. These people bought U.S. condos in 2005. They bought Chinese shares in late 2007. They are buying fertilizer right now. They will be burned.



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