NASDAQ Composite, Spring 2000 to Spring 2003
Remember when Intel (INTC), Microsoft (MSFT), Dell (DELL), Lucent (ALU), Yahoo (YHOO) and Cisco (CSCO) ruled the markets? There was an era, roughly 1997 to 2000 when those stocks actually mattered. They were important companies doing big things in terms of providing the technology needed for the next century’s communications and internet build-out. And then, they just didn’t matter anymore. Once the dot com bubble burst, every bounce or rally in these names was basically a selling opportunity…for 8 years and counting! See the above chart for a notion of how frustrating it must have been to stay positive on NASDAQ tech names.
It took a long time for people to get it through their heads that these stocks had seen the best valuations and prices that they would ever see. Investors couldn’t imagine a world where these stocks would no longer be important, but with each passing quarter and year, these NASDAQ Generals diminished in stature and market cap.
I believe that this story is repeating itself in the oil patch. Market participants seem to be in a state of disbelief that Chesapeake (CHK), Transocean (RIG), National Oilwell Varco (NOV) and ConocoPhillips (COP) aren’t important anymore. These stocks may have have seen the best levels they will ever see, at least for a long time.
OIH, the oil services ETF 4/2008 til Wednesday...sell rallies?
This is not to say that there won’t be phenomenal trading opportunities along the way. If crude stages any kind of recovery, I’m sure these names and all of the others will bounce, but will the backlogs for the service companies and drillers ever be what they were in late 2007, early 2008? I doubt it. And will proven reserves ever be valued as they were during the bull market?
When the credit crunch hit the hedge funds, we saw a raft of speculative money come out of commodities across the board. Then, industrial demand for oil literally disappeared from North America to China. These two events revealed to many newbies what the old school oil traders already knew, that commodities (and the related stocks) could be more volatile than what many were prepared for.
The major difference between the aforementioned tech giants during the peak of the dot com bubble and the oil and gas stocks now, is that the tech giants were coming down from price-to-earnings multiples of 30, 40, even 50! The reason they got that far ahead of themselves was that we were told that the growth would be unlimited and exponential. In fact, earnings of any kind were a detriment, because they meant that a company was too worried about short-term profitability as opposed to grabbing share and eyeballs (seriously!).
The oil names, in contrast, are trading at absurdly low multiples, in fact, the average PE ratio on the 18 oil stocks that make up the Oil Services ETF is only 5.08! This low multiple reflects the fact that last year’s earnings were peak earnings in this very cyclical business. Next year’s “E” is a giant unknown, but the market knows it ain’t going to stack up to when crude was over $100.
And so now, we will watch for years as these stocks grind it out in between the recent lows and the highs of yesteryear. In the meantime, investors on both Wall Street and Main Street will gradually come to the realization that the Chesapeake position they put on at 70 will not be break-even any time soon (if ever). In frustration, the hot money that came in but was too slow to sell closer to the top will come out, which makes all short-term rallies suspect in the entire sector.
I hope to see oil and natural gas prices find a nice equilibrium for consumers to be able to afford gas and for these great companies to be able to make money. On bounces, I will look for quick trades in the better names. That said, I won’t be placing any intermediate or long-term bets in the oil patch this year, as I believe that a once-in-a-generation parade has just gone past.
Sorry, bulls. T. Boone Pickens may not live long enough to see his $300 oil prediction come true.
Full Disclosure: Long CHK.