Thoughts on energy investing now

Posted by on Dec 8, 2014

Friday, both the S&P500 and Dow each closed at new record highs. Since that was the 48th and 33rd time, respectively, that a new high has been made by each index this year, that alone wasn’t particularly newsworthy. However, what caused Friday’s moves definitely was.

The jobs report for November from the Department of Labor (DOL) positively blew the doors – and most everything else – off of the number that was expected. US employers added 321,000 jobs last month. That’s the most since January, 2012. Even better, every major sector saw growth. With ten months now of job growth of more than 200,000 each month, we’re also on track for the best year of job creation going all the way back to 2000!

And last Wednesday, the Fed released its monthly Beige Book survey results. (It’s so named due to the color of its cover, and, I think, the majority of the information…) In reporting economic activity in each of its 12 districts, the Fed said views were “largely positive”, with most “optimistic” about the outlook in each district.

Seems to me that these are further positive indications that, whenever the Fed finally decides to raise rates, the economy will be fundamentally strong enough to continue growing.

Swimming upstream

Documented results from Dalbar, Inc., have shown that over many varied time periods, the majority of investors tend to significantly and consistently underperform the average results of both stock and bond funds. The main reason given is that due to the emotions created by events at the time, those investors will either buy high or sell low.

My point is that I think we’re at one of those points with regard to the energy sector.

What I see having developed over these past few weeks of oil price dropping is just wholesale bailing out of anything that seems to have some direct connection with energy production. I get that many portfolio managers are selling just to make sure they can show some gains before year-end. I’m not exactly understanding why, assuming no overall portfolio / tax-planning strategy, individuals are selling now.

It makes no sense to sell an investment just because the price has dropped. That just makes them cheaper to buy new. You need to consider what else is going on to create the slide. To me, the energy stock price reaction to the oil price drop is way overdone. We’ll see, to be sure.

I have no idea how low oil will go, though it did seem to settle down a bit this week. We know the price will change – up AND down. We have an over-supply of the stuff right now and our consumer-based economy is in a fine position to benefit from that. That’s why retailers, consumer discretionary and industrial shares are doing so well.

Please realize that these same low oil prices will stimulate demand at some level. As that demand increases due to higher demand and the other global economies again seeing growth, prices will rise.

So, if that’s the case, and my studies of market cycles do support that result, shares of most of these high-quality, world-class, strong dividend paying and – I believe – oversold, energy companies deserve a really close look…as a buy. No selling!

History is on our side

My buddy, Sam Stovall, who’s chief US equity strategist at S&P Capital IQ, put out a pretty interesting research note this week with some data to help support my suggestion.

He said that when the energy sector has dropped to similar relative levels, the next 12 to 24 months have seen rebounds that are “often violent.” He found six cases where this has happened before. There was one with a small 0.1% loss over the next 12 months. The average gain for the other five instances was 13.45%, not including dividends, which was just below the return for the S&P500.

If you’re concerned about timing, don’t put all your money in at once…stage it in specific amounts. Kind of like a mini-401(k) system.

If, on the other hand, you’re considering selling energy assets, review your sector holdings with an objective eye toward what would really be gained by selling. If you determine you do have some low-quality positions, perhaps you can liquidate those and roll the proceeds into your higher-quality stuff. Or, maybe take new positions in other high-quality firms you felt had moved away from you.

Be sure to check how well the dividends are covered as well, so you can enjoy some cash flow while you wait for your shares to move higher.

Liz Ann nails it

Liz Ann being, more formally, Liz Ann Sonders, US market strategist at Charles Schwab. She is one smart lady. Here’s what she said about the ripple effect of the low oil prices.

She observed that “consumer spending represents 68% of the US economy” Capital spending by the energy sector represents “about 1% of US GDP.” So, she determined, the benefit of lower energy prices to consumers and all the non-oil-related businesses “greatly outweighs the significant hit to energy and/or energy-oriented capital spending – especially in the energy-oriented states.” I told you she was smart…


I don’t think that the currently low oil price will, of and unto itself, create an economic boom. As Miz Sonders noted, however, it has wide-ranging positive effects in the economy. The drop is more reinforcement for the economic growth that’s pushed stock prices generally higher since 2009.

As to concerns about investing in energy shares in today’s market, please keep these things in mind.

A.)  Buying low is good.  B.)  Panic selling and scary headlines equal low prices. C.) Looking out five years instead of just the next few months will, in my opinion, provide you with a reward for your patience.