Today I want to talk about why I think the next couple weeks will be your last opportunity to buy inexpensive oil stocks this summer and possibly all year.
The reason? Seasonality. Oil prices tend to hit their yearly highs in the third quarter. That’s largely due to increased demand from millions of Americans and Europeans driving more for their summer vacations.
This tendency seems to fly in the face of one of those investor “rules” we’ve all heard a million times before: past performance does not guarantee future results.
It’s a mantra for mutual fund managers, financial advisers and newsletter editors. It has an almost Shakespearean meter to it, and if you say it enough you become numb to opportunities on the basis that all of the information you have is from the past - and therefore, unhelpful when it comes to making decisions about the future.
But that’s a perversion of the intent of this “rule.” It’s really not a rule at all, but instead of a piece of catch-all legalese. If I use that phrase, I am magically absolved of any responsibility should you follow my investment recommendations.
It should probably be shortened to “there are no guarantees” which already goes without saying. So when I say the next couple weeks could be your last chance to buy cheap oil stocks, I’m talking about degrees of possibility, not guaranteed certainties.
So let’s look at the possibilities...
Here’s a chart showing average price changes between 1978 and 2007 - which conveniently omits the skyrocketing prices in the summer of 2008, or the bizarrely low oil prices in 2009:
The scale on the right of the chart represents price growth, not actual dollar denominated oil. For this chart, anything under 100 represents a time when prices are falling, and anything over 100 represents a time when prices are rising.
You can see how prices tend to hit an initial high in May, then a slight hesitation in June followed by a steady surge through September.
So far this year, oil prices seem to be closely following the seasonal trend:
The companies that benefit from higher oil prices aren’t always the blue-chip giants. Companies like Exxon-Mobil (NYSE: XOM) and BP (NYSE: BP) hedge their oil production so that their bottom line isn’t hurt - or helped - significantly by seasonal price swings.
So who does benefit?
I’ll tell you, but you might not like the answer:
Oil services companies. Yes...like Transocean (NYSE: RIG) - the deep sea driller whose rig is plumb in the middle of the worst oil spill in history.
And right now, RIG is selling for a rock-bottom trailing PE of about 5.5.
That’s to be expected. No one wants to own this stock because there’s really no telling if they’ll be further embroiled in any liability or whether they’ll emerge unscathed.
But the amazing thing is - they’re not the most inexpensive oil services stock right now...
That honor would go to Noble Corp (NYSE: NE) with a trailing PE of just 5.27. The stock has been beaten down almost as bad as Transocean, even though they have nothing to do with the Gulf oil spill.
This $8.45 billion company is headquartered in Switzerland, and they’ve shown an ability to at least match gains made in the price of oil over the past 3 years:
If you’re looking for a way to profit from higher oil prices, I’d suggest averaging into Noble Corp over the next two to three weeks, but I wouldn’t chase shares higher than $35 - that’s about the median price for the past 52 weeks.
Disclosure: No positions