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This week, I started a new series about a portfolio I am starting with the intention of beating the market by a large margin. Before I introduce the new component of this portfolio, I would like to point out a few things due to the feedback I received in my introduction article.

Question 1: Are you going to push a bunch of speculative plays down our throats?

The answer is a clear no. This portfolio focuses on stocks that are usually underappreciated and many times more volatile than the market average but at the same time these companies have great fundamentals in addition to great potential. For example, in my first article, I introduced Monster Beverages (MNST) to the portfolio. This company is known to be a high-margin, high-growth, no-debt and high-potential company. The only speculative thing about Monster is that the media kept speculating about how Monster was going to get a huge fine or get banned because its products were "responsible" for death of a couple teenagers. So, we are not creating a portfolio of "speculative plays" even though we may have one or two such stocks in the portfolio. The great majority of the stocks in this portfolio will be companies with strong fundamentals and strong future potential.

Question 2: Have you heard of something called "tax" which is as certain as death? Will you account for that?

The answer is yes. At the end of the year, I will post results of the portfolio in two versions 1) if it was in a taxed account 2) if it was in a tax deferred account. That way, investors in both sides of the fence can get informed about the possible results of the portfolio. I may not mention tax implications in every article, but that doesn't mean I forgot those implications. Taxes will be mostly dealt with at the end of the year.

Question 3: Is this an "imaginary portfolio" or are you actually building it?

In this portfolio, I will not suggest any stock I don't already own. Every stock in this portfolio will be stocks that are already in my portfolio. On the other hand, the number of stocks I mention here may be different than the number of stocks that are actually in my portfolio. In this series, I will usually use round numbers in order to help with calculations.

Question 4: Are you better than the professionals that devote their lives to investment?

I am not better than anyone else; but keep in mind that this is my profession as well. In fact, my family has been in the investment business for multiple generations. Because of his successful investments, my dad was able to retire at the age of 48. I've been beating the market in 4 out of the last 5 years but I might have gotten lucky at times. Let's hope that my "luck" continues on. Oh also keep in mind the very well-known and widely used statistic that 87% of professional portfolio managers actually fail to beat the market. We all try to beat the market and we all have valid reasons for our investment decisions.

Question 5: Is this a one-portfolio stock?

No, this portfolio will have at least 12-13 stocks. I am introducing one stock in each article so that I can cover each stock sufficiently as opposed to writing one article that covers 12-13 stocks at once. The article wouldn't do a fair job of covering anything unless it was 15,000 words, which would bore many readers. This way, I bore my readers little bit at a time.

Question 6: Isn't this risky?

Yes it is. In the investment world, risk is correlated with returns. Higher the risk you take, the higher potential returns you will get. Of course this doesn't mean to go out and buy a bunch of companies that are on their death bed. Risk can always be reduced by doing good research.

Now, it's time to introduce the next stock in our portfolio, Statoil (STO). Statoil is a Norwegian company that searches for, finds, distracts and produces oil, natural gas and related products. I can already hear some of you thinking "after Nokia, you are going to tell us to buy another Nordic company? What is it with you and the Nordic companies?" In the past, I've invested in this company in medium term and it usually resulted in great returns. In the following sections of the article, I will explain why I am picking Statoil to be in this portfolio.

Low Valuation

When we look at Statoil, the first thing that hits us is the company's low P/E ratio. Currently, Statoil's share price is $23.00 whereas the company earned $3.73 in the last year. This gives us a P/E ratio of 6.16. For comparison, the average price to earnings ratio in energy industry is 9 and S&P 500's average P/E is 16. Furthermore, Statoil trades for 0.3 times its annual revenue and 3.3 times its annual cash flow. Next, we look at the company's balance sheet and we see $13.76 billion of cash hiding there (this number may change slightly each day depending on currency exchange rates but the daily fluctuations won't be much more than what we can call a rounding error). Excluding Statoil's cash, we are looking at a trailing P/E of 5.00 which implies that investors value this company as if it will see a sharp earnings decline in the future. In oil industry, sharp declines of earnings can happen in 3 ways: 1) really bad accidents like BP's accident in Mexican gulf, 2) a crush in oil price, 3) lack of finding new oil while depleting the existing resources.

Can the company keep it up?

Statoil has a good record that is almost free of accidents. The company isn't known for any big accidents that were caused by negligence. Furthermore, the company is good at replacing the oil it uses at a decent rate. In 2012, Statoil was able to raise its production by 8% compared to 2011 according to the company's annual report. In addition, Statoil was able to discover 1.5 billion barrels of proven oil reserves in addition to the existing reserves. As for oil prices, they seem to have stabilized, but if they were to go down, it would affect all oil companies and it wouldn't be Statoil's fault. This is a risk that every investor of oil companies must be ready to take on.

Even though the company was originally found to deal with Norway's oil reserves, it currently operates in 35 different countries. This is why Statoil isn't likely to be drastically affected by Norway's decreasing oil reserves. The company extracts oil in 12 countries, natural gas in 18 countries, conducts exploration in 18 countries, develops renewable energy in 2 countries and uses "unconventional" methods in 3 countries. Statoil has formed partnerships with many energy giants like Total (TOT), Exxon Mobil (XOM) and BP (BP) in many different projects across the world.

Dividends

Statoil's investors usually enjoy a generous rate of dividends. The company's dividend rate is based on its annual earnings and it can change greatly from year to year. For example, in 2008, the company paid 84 cents per share (yielding 2.00%), followed by 45 cents per share in 2009 (yielding 2.25%), followed by 92 cents per share in 2010 (yielding 4.65%), followed by $1.15 per share in 2011 (yielding 4.64%) and $1.07 last year (yielding %4.55). Given that Statoil earned $3.73 last year, it can easily support a dividend rate of anywhere between $1.00 per share to $1.60 per share for 2013. The current proposed dividend rate is $1.15 per share but this is subject to change any day due to the currency exchange rates. Given Statoil's current cash reserves and cash flow, this company's dividend is definitely safe for years to come.

Conclusion

In the last 52 weeks, the company's share price ranged from $22.00 to $27.40 and it currently sits at $23.00, which is very close to its 52-week low price. We are adding 400 shares of Statoil in our portfolio. We are not going to write any calls on this stock anytime soon because the dividend payment will be due next month. Once we collect the dividend, we can consider selling covered calls because the premiums of these calls will get higher after the dividend payment. Keep in mind that this company pays its dividend once per year.

So, after adding 200 shares of Monster , we are adding 400 shares of Statoil to our portfolio.

Source: The 'Retire Young' Portfolio: Let's Introduce This Oil Company