The Case for Accumulating Energy Stocks in 2016
The Case for Accumulating Energy Stocks in 2016
Call me a contrarian, call me a risk taker, but I see an opportunity. My name is Adam, I'm 29, entrepreneur, former Series 7 financial advisor, father, husband, real life trader and I am passionate about the financial markets. Below is my case for accumulating energy stocks now.
Before I get started, I want to be clear - I am not a pattern day trader while I can afford to be. While my good buddy Jerremy, CEO of Real Life Trading (RLT) loves to educate on day trading and swing trading, I am concerned about one thing, building wealth.
My investment considerations on why to buy a stock are focused on purchasing at a fair price with technical reinforcement, history of dividends, proven revenue growth, and strong or improving industry fundamentals. I also always check out the company's website, social platforms, listen to a recent conference call, and read some analysts' opinions, if available. You would be surprised how much you will learn by just looking at a company's Facebook page too. Lastly, I want to avoid taxes, so most of my buys in the brokerage account are held for at least a year.
You see, history does not repeat exactly, but it does tend to rhyme. So here I am recommending you buy energy stocks in a period that has marked some of the worst performance for these companies in decades. In fact, good luck finding an energy company that currently has a 'buyâ€ rating right now.
A little bit on history here which is always key to successful investing. One of my favorite financial authors is John Spooner. Quoting 'Do You Want To Make Money or Would You Rather Fool Aroundâ€ John wrote - 'In the last year, in my opinion, we had a chance to look at a favorite among the most hated group: energy stocks. With the slowdown in the Far East economies, oil and gas companies had been hit fairly dramatically in the last several years. The rationale is that demand for energy would decline along with the economies of the Pacific Rim countries and that the slowdown would inevitably spur to Europe and the U.S. This, coupled with warmer than usual winters, has led to oil prices declining. Markets always anticipate the future, right or wrong, and energy stocks should be accumulated when the investment world finds them out of favor.â€
This book was published in 2000 - 16 years ago. I know when I re-read that book a few months ago I was surprised by the similarity in the market and what is driving the downtrend today. Take a look at the long term oil futures chart below. And look where we are today.
Now on to the stocks. There are so many energy companies that are either at historically low levels already, or will be in the near future. What I find most interesting though is how these energy companies have grown over the past decade, from employees to infrastructure to global expansion. Yet, in some cases, you get the opportunity once again to buy them at a price they traded at so many years ago. Seems like an opportunity to me.
What is also interesting is how this energy crisis is effecting stocks on a global scale. Look at some of my favorite international heavy weights like PBR, PTR, NE, BP, TK and RDS.A. All are down big, and many are either sitting on or bouncing off long term support lines in some cases going back to 2000 and even earlier. We are talking below 2008 levels here in many cases.
When it comes down to why I recommend accumulating energy stocks now, lets take it in a few sections...
Demand for Energy Now and Into the Future:
First, look at the vehicles around you at work, when you are driving, when you are watching TV, movies and commercials. What do you see? I see SUVs, trucks, vans, sport sedans, commercial trucks, and sports cars with crazy horse power. As a car guy, I see horse power wars- much to my liking! Hell, even Cadillac is producing a 640 horse power car. Bottom line, energy needed for transportation is not going away anytime soon.
Now lets bring in some bigger points and feel free to check out the 400 page 2015 OPEC World Oil Outlook Report. They mention a few interesting points like "In 1970 there were less than 1 million cars in China. In 2013, there were 100 million cars on China's roads.â€ In addition, "The total number of commercial vehicles has increased five-fold between 1970 and 2013 going from 39 million to 206 million.â€ So lets be clear, by 2040 there will be another doubling of commercial and passenger vehicles. Its just a fact, if we add 3 billion+ people, they got to get around and they demand all that we have here in the U.S. And that is just fine. But bottom line, it takes more energy than we have today to keep a growing China and India satisfied.
Alternative Energy- Is This The Near Term Future?
Let's say that you are bullish alternative fuel, hybrid and pure battery powered cars will be the norm. Well, WOO Report states "The share of hybrid electric cars is projected to grow from 1% to 14% in the period 2013â€“2040. Natural gas powered cars is expected to increase from 2% in 2013 to 6% in 2040.â€ I can go on, but the point is a majority of the market will not drive an electric or hybrid powered car. And while there will be more efficient cars, there will more cars and commercial vehicles to offset this. And then there is growth in aviation, shipping, motorsports, military and petrochemical products as well.
And regarding a TSLA or a BMI i8 here, do you know anyone that owns one? I actually do on the Tesla. In my local network, one of my closer friends owns a sweet black on black Model S P85D. And he pays $963 a month, on a 72 month term. Hardly in the realm of most budgets, even if it does not require gas or oil changes. My point is this, it's a sweet car, and I'm sure their Model 3 will be a hit, but it's not a game changer that threatens the energy industry yet. While their fueling stations will grow, the ability to go anywhere and find a gas station is still the norm for the foreseeable future. Lastly, I drive an Infinity Q50S Hybrid, and it still gets only 28 miles combined.
However, if you do want to get into alternative energy, ICLN has been beaten down rather bad.
Now lets talk about the environment, and the necessity to reduce fossil fuels. Let's face it, an investment in energy stocks better take this into consideration. My recommendation is avoid energy companies heavy in coal. The agreed upon climate goal to keep within the 2 celsius goal by the end of the decade will be about large scale power transformations, like for example power plants. Coal must continue to be reduced and the world will then have to increase natural gas, solar, hydro, wind and nuclear. But fossil fuels are here to stay for some time, whether you agree with it or not. It started the industrial revolution, and we are decades away from transitioning off the dependence for it.
Now lets look at some additional charts of some seriously beaten down domestic energy companies.
FCX [Not only an energy play, but one I am accumulating shares on also]
I think its important to cover the timeline on benefiting from accumulating these stocks. This is a long term play, though day traders will have fun with some wild moves up and down along the way. I would say it will take at least 1-2 years before I take some risk off the table; to see the highs again in these charts will likley take 3 to 5 years.
I find it interesting that the WOO report said they expected oil to stabilize in the $50's in 2016, and by 2018, rise to around $70-80 per barrel. And that it would stay there for some time. Well as I write this on February 20th 2016, oil is below $30. So, I would expect oil to end 2016 around $40-50 per barrel. And then still hit their $70-80 target by 2018. In other words, be prepared to be patient.
Also one interesting point is that because oil has fallen so much, it naturally forces these energy companies to scale back on new investments and exploration. What could happen is that once these cuts fully take effect, we could see quite the opposite in a few years where demand outpaces supply. And that is where 100 a barrel comes back, and we probably hit an all time high. This is a pure hypothetical, but I think it has a fairly good chance of playing out this way.
And as a buying recommendation, you should focus on the dividend players now that are cheaper. It's nice to be paid while you wait. Grant you, if we do remain in this cycle for much longer, only the biggest companies like RDS.A and PTR will be able to afford a dividend. Even the larger BP, XOM, PSX, and Chevrons of the world will also be reducing theirs if this is the case. And I got to mention PSX. If its good enough for the Oracle of Omaha its good enough for me. Grant you, it ain't cheap- his buyers at Berkshire won't let it break 70!
Bottom line is this, oil could stay in the $30-40's for years. But if that is the case, I would be concerned that it leads to true global financial crisis. At the macro level Russia, Venezuela, Saudi Arabia and even places here in the U.S like Alaska cannot afford to keep the status quo at these prices. In addition, cheap oil effects the major banks all over the world that hold the oil companies debt. If these low oil prices do continue to play out for another year or two, I would bet this would be a real catalyst for another recession.
To conclude, I think the largest oil producing players come together, finalize a deal on a freeze and we start returning to business as usual. Also after the election is over, I expect that to have a bullish effect as well. And I hope you join me in having a sizable position in the best energy companies by then.
Thank you for reading and allowing me to contribute my thoughts. I am excited to learn from and share with people out there who love the markets and trading as much as myself, Jerremy and his team. Let's all continue to support RLT!
- Adam Faragalli.
Adam has been called an old soul. He understands money is not the key to happiness, it's just there to help keep score. Adam is also a leader in digital marketing helping Titan Web Marketing Solutions Inc. grow as co-owner.
Ps. Every Wednesday afternoon Real Life Trading has Energy Wednesday from 5-6 pm Eastern. This class is dedicated for those interested in swing trading and longer term stock and option plays.
Each class is recorded and emailed out at 8:30 pm Eastern for those who can't attend live. Here is one of our most recent recordings of Energy Wednesday. Here is one from many moons ago, just as a comparison. 9/30/15 Energy Wednesday.
If you are interested in this kind of analysis, fun atmosphere and great trade set ups, click here to register.