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Why There's Still Plenty of Room to Run in Energy StocksBy
Friday, March 18, 2011
When oil services stocks boom, they REALLY boom... and investors make fortunes.
With decades of stock market history at our disposal, that's the conclusion reached by my soon-to-be introduced True Wealth Systems advisory.
Oil services companies literally "service" oil wells. They maintain, repair, and manufacture equipment for drilling, and provide research and advice. And when these stocks start booming, they really boom.
The chart below shows it. Going back 70 years (as far back as we have data), our strategy for trading oil booms and busts compounds wealth at a 19% annualized rate when in "boom" mode. That's nearly two-thirds of the time.
 Since the late 1980s, oil services stocks have had a history of bottoming out at a low price-to-book ratio before taking off for triple-digit gains.
On three separate occasions since 1995, oil services stocks have bottomed around two times book value and peaked at over four times book value.
It's happening again... Oil services stocks bottomed below two times book value in 2009. But we're still nowhere near the top. We're nowhere near four times book value. Take a look at the chart...
 Sure, oil services stocks have had an extraordinary run recently. But when you take a look at the chart, history shows us there's plenty of upside from here – triple-digit gains are possible from current levels.
To double-check, we can size up oil-services stocks in another way... on a price-to-earnings basis. The picture is similar...
 Oil services stocks have traditionally been a bargain whenever they sell for less than 20 times earnings. As the chart shows, oil services stocks have dipped below that level a handful of times in the last 20 years. It's typically led to triple-digit gains.
So while it's undeniable oil services stocks have soared in recent months, these charts confirm they're still not overpriced – there's still room to run.
Could a short-term correction hit oil services? Sure... But as you can see, these stocks are still cheap relative to their history. And oil prices, which drive these stocks, are still in a major uptrend. That means it's time to be long this "boom and bust" group of stocks. We are in True Wealth Systems.
Good investing,
Further Reading:
Over the past six months, Steve has been sharing a few select True Wealth Systems calls with DailyWealth readers...
In six months, his recommendations on steel and coal, for instance, are up 15% and 35% respectively. And if you bought this "Halloween Trade" in October, you'd already be up 15%.
Market NotesDOES MATT BADIALI HAVE A CRYSTAL BALL? Matt Badiali's "going defensive" move back in January is turning out to be a great one...
For the past several years, readers of Matt's commodity-focused S&A Resource Report advisory have enjoyed a constant string of huge capital gains. By October, commodities in general had climbed 40% off their March 2009 lows... then they exploded another 20% into early this year. This helped produce big gains in the resource sector and caused lots of speculative money to flow into popular sectors like gold and silver stocks.
That's why, in January, Matt cautioned readers to take a good amount of profits... and turn to out-of-favor sectors like natural gas. Specifically, he recommended buying shares in one of North America's great energy hoards, Canadian gas producer EnCana. The company owns a vast amount of "PUDs"... and was paying an inflation-proof dividend of 2.5%.
As you can see from today's chart, going for out-of-favor assets was the right move. Many commodity stocks are well off their January highs. But EnCana has actually climbed 15% in about two months. Concerns over Japan's nuclear plants make natural gas look better and better as a source of fuel... and have produced a rally in cheap gas stocks.
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