Price of Oil Headed Higher Two Top Investors Say
The two newsletter writers with the best track record of predicting oil-market moves say the bottom is near.
The price of oil is close to hitting bottom, and should be significantly higher in the next couple of years.
That is the judgment of the select few advisors — out of the several hundreds I monitor — who have a good enough oil-timing track record over the past decade to justify our paying attention to what they are saying today about the price of oil.
The accompanying graph shows that oil’s price today is more or less exactly where it stood 10 years ago. But an oil-market timer could have made a lot of money simply by sidestepping the dramatic bear market in the latter half of 2008, re-entering the market in early 2009, and then exiting again in mid-2014.
Not surprisingly, given the difficulty of successful market timing generally, most of the oil timers I monitor did worse than if they had simply bought and held. That’s because they were trend followers, becoming more bullish as oil rose in price and more bearish as it declined. As a result, they were most bullish when in fact they should have been bearish — and vice versa.
Even among those few advisors whose oil-market timing added value, needless to say, none successfully called — to the day — each of the past decade’s major tops and bottoms. But two advisors emerged when I relaxed my criteria to getting it right two out of three times, and defining “getting it right” to have been net sellers of oil industry stocks in the six months prior to the mid-2008 and mid-2014 tops and/or net buyers at the January 2009 bottom. They are Jim Stack of InvesTech Research and Kelley Wright of Investment Quality Trends.
Significantly, both are bullish now. Furthermore, their rationales for being bullish are entirely different, which increases our confidence in their bullish consensus.
Stack’s approach rests on a combination of technical and fundamental analysis. Technically, he is very impressed with oil’s successful retest in March of its January low. Over the last three decades, he says, there have been only five other occasions in which oil’s price dropped at least 30% during an equity bull market. In all five cases, oil’s bottoming process was short “with only a brief and generally satisfactory retest of the lows.” Oil’s price action earlier this year neatly fits that template.
Stack says that the technical picture will improve even more if oil remains above its March lows for two more months — through August. He arrived at this August threshold by analyzing oil’s bottoming process in 1998, which lasted the longest of any of the five prior oil bottoms that he studied. On that occasion, oil’s final bottom didn’t occur until five months after what initially looked like a successful retest of the lows. Michael Kahn, the technical analyst for Barron’s, also predicts a recovery after a few more months of pain, and sees potential for big gains in oil investments.
The fundamental reason for being bullish on oil, according to Stack, is that global oversupply will lessen in coming months — despite OPEC’s refusal to cut back their production. Stack says that the U.S. is now acting as the swing producer in the global energy market, and drilling rig counts are down by more than half since late last year.
On the assumption that oil’s bottom is in place, Stack anticipates a big increase in oil in coming months — well in excess of the 36% increase oil has turned in since its March lows. The average 12-month gain following those five prior bottoms, he says, was 70.3%. A similarly sized increase off of this past March’s low would propel oil to $73.90 by next March.
Kelley Wright’s approach is based on stocks’ dividend yields. He believes that, so long as one focuses on blue-chip companies with strong financials, the dividend yield is a reliable guide to over- and under-valuation. Specifically, he deems a blue-chip stock to be undervalued whenever its yield is trading near the high end of its historical range, and overvalued when its yield is near the low end.
This approach has acquitted itself admirably. At oil’s mid-2008 top, for example, not one of the numerous blue-chip oil stocks on Wright’s watch list was considered undervalued. At oil’s early 2009 bottom, in contrast, seven were.
Today, according to Wright’s methodology, six oil companies are undervalued. In an interview, he mentioned three in particular as a “Holy Trinity” that are especially worthy of our attention: Chevron (ticker: CVX ), which yields 4.6%, ExxonMobil ( XOM ), which yields 3.6%, and Schlumberger ( SLB ), which sports a 2.4% yield. He emphasizes, however, that his approach is not for short-term traders, since it sometimes can take several years for the rest of the market to fully price today’s undervalued situations.
Stack’s preferred energy investment is an exchange-traded fund: the Energy Select SPDR ( XLE ), which invests in energy stocks within the Standard & Poor’s 500. Interestingly, this ETF’s three biggest holdings are also Chevron, ExxonMobil, and Schlumberger.