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, Blockdesk (1,459 clicks)
ETF investing, CFA, portfolio strategy, long/short equity
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Summary

  • Put the market-makers and prop-desk traders on your side.
  • They tell what big-money funds are buying, how far those clients will push prices.
  • Not by what the sales types say, but by the way the block desk hedges its bets.
  • Likely Odds & Payoffs are based on hundreds of prior hedges like today’s.
  • Simple, time-efficient risk-management discipline compounds double-digit payoffs multiple times a year from a steady flow of screened candidates.

Suppose you had a friend whose employer for a number of years has paid him over a million dollars a year for picking stocks that could be sold, better than 6 times out of 8, in less than two months, for prices at least +12% greater than they cost. Repeating that half a dozen or more times a year at least doubles the boss's money.

And he left his today's ranking list of the energy stock group by accident in your car as you drove him home. Here's what it said:

(click to enlarge)

It looks like the forecasts of likely prices for the ten best most interesting stocks have upside price changes possible averaging over +11% with past price drawdowns at their worst of about -8%. The ten companies over the past 4 years (993 market days) had 1470 similar forecasts and made money in 81% of them, according to the blue totals row in his list. If it only took only 8 weeks of 5 market days each, they could be repeated 6 to 7 times a year, which at a net gain of +9.3% would produce profit at a rate of +75%.

Look at the differences between these top ten and the next 25 "good quality" names. Those regarded as lesser issues are only so in terms of how much history is available on them. That set averages forecast histories over about the same length of time, 3½ years (903 market days) instead of 4 years. But the frequency of opportunities like what is seen today has happened about 2/3rds as often.

And there is a minor reduction in performance expectations, by 1% less, from +12.7 to +11.7%. Offsetting that they have smaller average worst-case drawdowns in price in the 3 months following forecasts like today's (-7% vs. -8%). On a prospective reward (+12.1%) to experienced risk (-6%) they rank better than the high-interest group. (1.8 to 1.6), but each group retains a favorable trade-off.

Many of the top names are easily recognized, like Halliburton Company (NYSE:HAL), one of the largest providers of oilfield production services and products to the energy industry, and Baker-Hughes (NYSE:BHI), a major oilfield services competitor of HAL, specializing in drilling technologies. Independent petro-producers EOG Resources (NYSE:EOG), and Kodiak Oil & Gas (NYSE:KOG) are actively involved in employing the new extractive technologies of horizontal drilling and "fracking."

Other names in the good quality but lesser history set are less well-known, but maybe should be: Williams Companies (NYSE:WMB) is an important factor in the essential and expanding pipeline transportation and mid-stream processing business.

These 35 stocks have had historic performances far better than the 273 other Energy Industry stocks and ETFs that include them. The comparisons of achieved payoffs following prior periods of expectations like those of today by the larger population is grossly deficient, at +3.2% compared to their experienced worst-case average drawdowns of-9.3%.

That does not damn the others throughout their histories, but is simply that at their current prices and balances between upside and downside expectations, they are not competitive with the listed 35. What tomorrow's or next month's prices and circumstances will offer may well be another thing.

But for now, the better choices should be evident. And the market-proxy ETF comparison of the SPDR S&P500 (NYSEARCA:SPY) may offer a risk-exposure reduction (-3.8%), but at a high price in both expected performance (+5.3%) and worse yet, in demonstrated performance (+3.3%).

Conclusion

Do your own DD on specific stocks' fundamentals and "street" analysts' forecasts, with appropriate discounts for "investment banking" biases that at times have been blatant and required.

Overall market prospects are not particularly exciting, especially in big-cap involvements. That does not denigrate the usefulness of traditional defensive strategies in hiding capital in huge integrated international oils during threatening times. But for wealth-building purposes, independent producers (selectively) and transportation and services companies now seem to offer the best situations.

Source: Energy Stocks, Ranked For Wealth-Building, As Seen By Prop-Trade, Block Trade Desks