Breaking Down the Oil Service Holders ETF (ETF: OIH)

Eddy Elfenbein submits: Here’s a closer look at the 18 stocks in the Oil Service Holders ETF (OIH). This has become one of the most popular exchange-traded funds on Wall Street. Since May 13, the ETF is up 75%.

I’ve thought that this sector has been overpriced for some time. Yet, despite what I think, the stocks keep going up, up, up.

With this chart, I wanted to show you just how high Wall Street’s expectations are. Look at the projected five-year growth rates. It’s rare for a company to grow its earnings 20% a year for five years, much less 30% or 50%. These projections are very optimistic.

Note: This is a corrected version of my original post where I had listed the 35 stocks in the Dow Jones Oil Equipment Services Index. Thanks to Roger Nusbaum for pointing me in the right direction. You can see more info on the OIH here.

Symbol	Company	Proj. Five-Year Growth Rate	Forward P/E	Market Cap
BHI	Baker Hughes	15.0%	21.6	$24.8
BJS	BJ Services Company	22.0%	19.6	$12.9
CAM	Cooper Cameron	16.0%	23.1	$5.4
DO	Diamond Offshore Drilling	40.0%	15.6	$10.4
ESV	ENSCO International	44.0%	12.2	$8.0
GSF	Globalsantafe	45.0%	14.0	$14.1
GRP	Grant Prideco	25.0%	18.9	$6.2
HAL	Halliburton	17.5%	20.0	$38.1
HC	Hanover Compressor	7.5%	53.8	$1.5
NBR	Nabor Industries	58.8%	13.0	$12.3
NOV	National Oilwell Varco	25.0%	23.2	$12.4
NE	Noble	43.0%	15.0	$11.3
RDC	Rowan Companies	25.0%	12.9	$4.7
SLB	Schlumberger Limited	17.5%	26.7	$72.3
SII	Smith International	17.0%	21.1	$8.8
TDW	Tidewater	29.0%	12.8	$3.1
RIG	Transocean	50.0%	17.6	$25.5
WFT	Weatherford International	25.0%	21.0	$15.0

Comments

[User 1:]

Eddy, this is a REALLY useful post. But I'm not sure what your conclusion is. Should we just be buying the lower-PE stocks, or steering clear of the sector altogether?

2006 Jan 27 06:09 AM

[User 1:]

I think the ETF is weighed by market cap. That means that Schlumberger has a large impact on the PE.

2006 Jan 27 06:13 AM

[Roger Nusbaum:]

I think I am confused. Acording to the HOLDRS web site OIH has 18 components not 35. Here ae the tickers with their weightings;
BHI 10.27%
BJS 7.47%
CAM 2.54%
DO 5.90%
ESV 3.81%
GRP 2.90%
GSF 7.80%
HAL 11.01%
HC 0.50%
NBR 6.25%
NE 6.04%
NOV 3.33%
RDC 2.31%
RIG 9.33%
SII 4.45%
SLB 9.11%
TDW 1.81%
WFT 5.18%

Click here for more details.

HOLDRS are not Cap weighted. They are all trusts that were created in such a way that they can not be changed by MER. Most started woth 20 components and now most a a few less due to take overs. The share amounts in there now are what was put in there at the beginning.

Am I missing something with Eddy's post and the 35 holdings?

2006 Jan 27 08:43 AM

[UserThunder...:]

OIL is missing here.

Mar 16 02:00 PM

[Den555:]

Does OIH have an initial investment minimum?

Sep 12 07:44 PM

[pierre5678:]

Hi all!
Interesting reading your comments here!
But I have some more questions and thoughts.
@ Eddy
You write: " ... Look at the projected five-year growth rates. It’s rare for a company to grow its earnings 20% a year for five years, much less 30% or 50%. These projections are very optimistic..."

It would be worth double checking those numbers. I tried it now, but I think the Holder website is down, to start with.
Do you have any other sources, other than the data provided on the holder webpage?

Another idea, I borrowed from Peter Lynch, is that cyclical stocks' p/e ratio are to be considered in an inverse way; high p/e ratio means an end of a downward cycle, and hence a buy; and vice versa. This would mean that oil service companies stocks are still cheap, regardless their sharp rise.
But this assumes, that oil service companies are cyclical stocks. At least in the past they behaved in a cyclical way. But oil was not running outin the past, as we know nowadays. The point I want to make is that in a running out of oil scenario those stocks could go far higher.If we are really running out ? And I would not bet against it. According to Matt Simmons, the oil infrastructure is pretty old and need some serious investments. On the top of that, less easy oil means more investment in the exploitation infrastructure.
The future will tell us ...
I am just surprised that the oil service sector underperformed crude oil prices over the last 10 months. Buying oil etfs would have been a better trade ...

Greets
Pierre

Nov 22 05:22 PM