In addition to political, economic and environmental trends supporting long-term investment in oil and gas, we think there is a reasonable chance the near-term gains could be unusually strong. As a result, we do not counsel “Sell in May and Go Away”, as the popular expression summarizes the historical seasonal pattern during which the stock market gains from May to November are slight compared to those from November to May.
Instead we see a strong historical comparison to May 1979, when we wrote one of our better-timed buy recommendations A Change in Fundamentals – The Case for Major Upward Revaluation of Domestic Oils. The ten stocks gained an average 24% in price from May 1 to November 1 en route to further advances (see table U.S. Domestic Oils, 1979 below). The list reads like a page from oil and gas history. Each of the underlying companies was acquired, merged or restructured in subsequent years.
Today our large cap buys are more global with integrated companies domiciled in Europe, Russia, China and Brazil as well as the U.S. Another distinction today is the creation of new high-potential independent producers in the U.S. and Canada that have grown to large cap size. To build a new large cap portfolio, pick the lowest McDep Ratio buy in each group, which would be Chevron (CVX), Total (TOT), Lukoil (OTCPK:LUKOY), Devon (DVN), and Canadian Oil Sands Ltd. (OTCQX:COSWF). Then choose other stocks to substitute or supplement, for example, to gain more natural gas exposure.
Meanwhile, oil price, the most direct indicator of industry conditions, trends up with the latest quote for the next six years at $107 a barrel, compared to the 40-week average of $93.
Originally published on April 26, 2011