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It’s Time To Start Selling Oil

Mark — Thu, 21 Apr 2011 21:13:53 +0000

I have been a long time oil bull. One of the major integrated oil companies has been a long time fixture in my investment portfolio. I also own a commodities fund which owns many oil and metal stocks. I even bought a few shares of Halliburton when they are trading back in the $20 to $30 range. Despite all of this, I think that crude oil has gotten ahead of itself. Here are my reasons.

Supply/Demand

A simple look at oil supplies and the level of demand globally reveals that crude oil should not be priced at over $100 a barrel. Oil closed at $112 a barrel and regular gasoline is averaging $3.84 per gallon. The fundamentals are not there to support the higher prices. Saudi Arabia recently dropped its oil production stating that demand is simply not there. The country’s officials thought that more oil would be needed because of supply disruptions in Libya. That turned out not to be the case.

The reason for the rise in oil prices is pure speculation. Even OPEC has stated that speculators are adding to the escalating price of crude oil. They believe that speculation could be adding as much as $20 to the price of crude oil.

Risk/Reward

Big dividend yields are enticing to me and a sign of when oil stocks are cheap. Total and Conoco Phillips are still good dividend stocks but the sector has less and less dividend plays. For example, I was very bullish on Exxon when the yield was over 3%. Now with a yield barely over 2%, I wouldn’t be rushing out to buy the stock. The majority of stocks in the sector are no longer cheap and many are pricing in $100 oil as an ongoing reality.

The value is not there for many stocks in the sector. Even oil service companies like Halliburton are no longer the great value plays that they once were. Now is not the time to start new positions in most of the oil companies.

Other Investment Areas

I am still bullish on commodities but I prefer to look at copper, silver, and agricultural products that have been pulling back lately. As I mentioned on Wednesday, I like companies like Freeport McMoran because the fundamentals favor higher copper prices over the long term. The 14% pullback in prices looks like a good opportunity in the sector. Silver prices have declined 11% and there is still room for growth as demand is solid as well.

Investors do not have to rush out and sell their oil shares but they need to pay close attention to the market. Commodities are a cyclical sector that should be sold when prices are high and bought back into when prices are low.

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MCW Energy Stock Analysis

Mark — Sat, 19 Mar 2011 21:58:23 +0000

Let’s take a look at a company in the energy space that may represent a solid investment opportunity.

MCW Energy Group (Frankfurt: MW4) is an established energy company whose shares are now trading on the Frankfurt Exchange. The company participates in the highly lucrative energy sector and is positioning itself for long term growth. This is part of a paid, but independent Research Series on MCW Energy Group. I support the views and opinions expressed in this Series. I do not own any MCW Energy Group Securities. Please review the Disclosure Policy .

MCW History

MCW is a Canadian holding company with operations and distribution facilities in California. MCW Energy is not a fly-by-night operation. The company, founded in 1938, has been in business for nearly 75 years. MCW seeks to grow beyond its distribution business and expand into oil sand exploration and production.

MCW Energy Group distributes a large amount of branded and unbranded gasoline in the Western portion of the United States through its subsidiary, McWhirter Distributing Company.

One of the many positive things about the MCW Energy Group is that they are a profitable company. McWhirter Distributing produced sales revenue of nearly $189 million dollars and the company reported a $2.7 million dollar operating profit. While the distribution business is relatively low margin, MCW hopes to gain a competitive pricing advantage via its oil sand recovery operation.

Energy Industry Outlook

As any smart investor knows the oil industry is a great area to invest in right now. Oil is trading for over $100 a barrel and gas prices are near $4 a gallon. Oil prices are expected to continue their upward rise as global economies continue to improve.

The rise in oil price should benefit any company that is able to harvest oil cheaply. The cost of oil production for MCW ranges from $18 to $20 per barrel. The company should have incredible profit margins so long as oil prices remain high.

The future continues to look bright for the oil industry as demand is expected to increase due to population growth in countries like China and India. The United States dependence on oil is still very high. Tensions in the Middle East have also led to supply concerns, making regional oil production a preferred alternative.

MCW is forecasting high double digit annual growth rates as the company expects to benefit from the growth of its core fuel distribution business and the ramping up of its production operation.

In the alternative energy space, MCW participates in the California Fuel Cell Partnership Program. This partnership focuses on finding sustainable energy sources and promoting the use of vehicles that rely on fuel cells.

Investors should take a closer look at this energy company that has the opportunity to benefit from both traditional and future energy sources.

This is part of a paid, but independent Research Series on MCW Energy Group. I support the views and opinions expressed in this Series. I do not own any MCW Energy Group Securities. Please review the Disclosure Policy .

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How To Profit From Rising Commodity Prices

Mark — Mon, 31 May 2010 05:43:29 +0000

The summer driving season is almost upon us. Millions of Americans will take vacations and travel to their favorite summer destinations. As more Americans take to the road, gas prices are likely to increase. From Memorial Day to Labor Day is when oil prices normally see their biggest rise. So, how can you profit from the coming surge in oil prices?

1. Buy one of the major integrated oil companies.

Take your pick from Hess (HES), Exxon (XOM), Chevron (CVX), BP (BP), Royal Dutch Shell (RDS), ConocoPhillips (COP), and Total (TOT). Most of these companies are trading at just 7 and 8 times earnings. A rise in oil prices will be a big boost to these firms bottom lines. Oil investors will also reap some nice dividends from most of these companies.

2. Buy the oil service providers.

Oil service companies like Halliburton (HAL), Schlumberger (SLB), Transocean (RIG), and Baker Hughes (BHI) all stand to directly benefit from rising oil prices. Rig rental rates will rise with any increase in oil prices. Regulatory fears and analyst downgrades are making this sector start to look more attractive. Even if new regulations increase the costs of drilling, these costs will be passed along to the consumer.

3. Buy an oil ETF.

If you don’t feel like trying to guess which oil stocks will flourish, you can buy them all with an oil exchange traded fund. ETF’s like the Oil Services Holders (OIH), iShares Dow Jones US Energy (IYE), and the iShares Dow Jones US Oil & Gas Exploration (IEO) will provide you with exposure to the oil and gas sector. The OIH buys shares of oil service companies. The IYE will give you exposure to the major integrated oil companies and the IEO purchases oil exploration and production companies.

4. Buy a leveraged ETF.

Speculators looking for risk can buy shares of the ProShares Ultra Oil & Gas ETF (DIG) and the ProShares Ultra Crude Oil Fund (UCO). These ETF’s seek to double the daily performance of oil. These funds are suitable only for trading. Avoid risky ETN’s like DXO which are likely to be shut down by regulators.

Disclosure: I do own shares of BP.

Photo by: Tedsblog

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Massey Energy Takes It On The Chin Again

Mark — Thu, 08 Apr 2010 05:01:52 +0000

Shares of Massey Energy (MEE) dropped another 7% today to end the day at $45.22. Massey has fallen almost $10 per share since the explosion in its Upper Big Branch mine in West Virginia this past Monday.

Analysts are recommending buying shares based on the recent drop off. The stock is trading at its lowest level since March 2nd. Shares appear cheap trading at 16 times 2010 earnings estimates of $2.78 and 9 times 2011′s earnings of $5.02. So, should you buy Massey Energy at its current price?

Anyone buying Massey’s shares is speculating because you just don’t know how this situation will play out. I don’t see how analysts and investors can have any confidence in Massey’s earnings for the foreseeable future. It’s hard to put much stock into the 2011 earnings estimate of $5.02 per share. Here are three reasons to avoid investing in Massey Energy.

1) Massey Energy will now be under a microscope with the company likely facing increased regulation from the federal government and the state. Increased regulations on mining operations will lead to increased production costs. These production costs will cut right into the company’s profitability. Mines will have to be brought up to code and miners will need to get better equipment and better safety training.

2. Massey Energy appears to have been failed by its leadership. An important part of value investing is trusting a company’s management team. Investors cannot have any confidence in Chairman & CEO Don Blankenship’s leadership. He has placed the company in the hot seat by overlooking over 450 mining violations at the Upper Big Branch mine since 2009. Blankenship has a history of disregarding worker safety and Blankenship should be help accountable for the company’s lax procedures.

3. Massey Energy will now likely face unionization and a number of civil lawsuits. Labor unions are good for the employees because it will improve working conditions and benefits. Labor unions will also increase wages and operating costs for Massey. If the mining giant is found negligent in wrongful death lawsuits, the company’s earnings will take a big hit.

Blankenship has no one else to blame for its current situation but himself. If the CEO had taken care of the repeated violations, than the firm’s image would not be so tarnished today. Until there is greater clarity into the extent of Massey Energy’s culpability; it’s difficult to tell if shares are a value or a value trap.

Photo by iLoveMountains.org

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NRG Energy Downgraded

Mark — Sat, 27 Mar 2010 22:09:18 +0000

Shares of NRG Energy (NRG) have taken a beating over the past 6 months dropping 30% since October. Shares have fallen from $29 to the low $20′s. NRG closed the week at $20.25. I first noticed NRG when Warren Buffett started buying shares in 2008. Buffett currently owns 6,000,000 shares.

NRG has been downgraded by Bank of America amid concerns of lower fuel prices. Bank of America has placed a $24 price target on the ultility firm. Citigroup downgraded NRG’s shares as well based on an expected decrease in profit fron declining dark spreads. Citigroup has a $25 price target on the stock. Goldman Sachs lowered its price target on NRG to $28 and has dropped the firm from its conviction buy list.

I am a big believer in buying shares of strong companies that have been beaten down. Analyst downgrades often signal a bottom for a stock. While shares are not a steal at $20, NRG is quickly becoming a value stock. It would be ideal to purchase shares around $17, since next year’s earnings are expected to be $1.20 and the five year EPS growth rate is 6%. This may be a good opportunity to start building a position in NRG. If commodity prices rebound NRG could rise significantly.

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Your 2010 Investment Playbook

Mark — Sat, 09 Jan 2010 20:07:19 +0000

2010 will be a year in which a premium is placed on investment selection. From March of 2009 to December of 2009 it didn’t matter what stocks you invested in; everything went up. 2010 will not be a repeat of 2009. 2010 is all about company specific earnings. Only invest in companies with strong balance sheets and sustainable earnings growth.

Here’s what I expect for 2010:

Financial Sector

Financial Stocks will lag the S&P500. Banks will continue to be plagued by high unemployment, credit card defaults and home foreclosures. Major retail banks like BofA, JPMorgan, and Wells Fargo appear headed for a choppy 2010 with earnings hits and misses.

Technology Sector

Tech Stocks will outperform the market as a whole. The Google’s and Apple’s of the world will continue to shine with strong earnings growth and increased profits. Whether it’s cell phones, laptops, netbooks ,tablet PC’s or chips, this sector is loaded with strong financial companies whose shares have upside potential including Intel, HP, Qualcomm and even Dell.

Energy Sector

Energy stocks are a safe play for 2010. Energy stock earnings appear to have bottomed out in 2009 and any rebound in commodities prices will be an earnings driver. Great dividend yields will reward investors while waiting for a bounce back in oil and natural gas prices. BP, Conoco Phillips, Chevron, Royal Dutch Shell are yielding from 3.5% to 5.8% in dividends.

Retail Sector

The retail sector will underperform in 2010. Retail companies have seen their share prices rebound explosively over the last 15 months based on an expected recovery. Until there is jobs growth and appreciation in home prices, the consumer will remain soft. Most of the growth for the retail sector appears to be already valued in most companies.

Industrials Sector

Industrial stocks will outperform in 2010. Basic material companies and industrial good manufacturers have tremendous upside based on any kind of recovery in the US. Rising metal prices and a continued recovery in emerging markets would benefit firms like Caterpillar, US Steel, Freeport McMoran and Joy Global.

Healthcare Sector

Healthcare stocks will rebound in 2010. These stocks were beaten down based on fears of a public option in national healthcare. Those fears appear to have been unfounded. Wellpoint and UnitedHealth should be much higher at the end of 2010. Drug manufacturers Pfizer and Abbott Labs are solid value plays.

Staples Sector

Consumer staples will be inline with the S&P for 2010. Experts are expecting investors to run for safety and bid up large cap consumer staples. Large cap staples like Colgate, Unilever and Proctor & Gamble will perform adequately but won’t beat the market.

The dollar is still king. The dollar will continue to strengthen as investors worldwide flock to the safest currency.

Now is not the time to buy bonds. I think the time to look at bonds will be in the 4th quarter of 2010 as interest rates will start to rise.

My favorite sectors for 2010 are industrial, energy and tech. I am really bullish on small and midsized construction companies and mid sized tech companies. Listed below are some of my favorite stocks for 2010.

AK Steel

Chicago Bridge & Iron

ConocoPhillips

General Electric

Intel

Neutral Tandem

Nuance Communication

Nucor

Check out the The Finance Blog’s Network Investment Advice For 2010

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