At the end of year, I examine my portfolio and decide if I need to re-balance or change directions in my investment strategy. I have been an Apple (NASDAQ:AAPL) bull since early 2013 when I first purchased the stock in February, 2013. I continued to add to my holdings until about June, 2014. I was so overweight AAPL that any good money manager would have said I should sell a significant portion of my holding. So if AAPL makes up a disproportionate amount of your portfolio, you too may want to consider paring some of your Apple holdings.
Just over a month ago, I sold off roughly 25% of my Apple stock and am prepared to sell another 25% at the beginning of 2015. This still leaves Apple in an overweight position relative to the total portfolio (~20%) if I make this move. When I sold, I did not know what sector or company I wanted to rotate into. I had considered sitting on cash until this week when I made my first of what I believe to be several purchases in the energy sector when I purchased Conoco Phillips (NYSE:COP) on December 10, 2014.
I, like everyone else, am watching gasoline prices fall on a daily basis and believe opportunity lies in the lower gas prices and the energy sector as a whole. I see risk and opportunity as two sides of the same coin. Risk creates opportunity, if one is on the right side of the trade. Many will say I should not catch a falling knife because I will get cut. I actually plan to get cut a little bit. No, I am not masochistic, but I know that I follow a stock and sector much more closely when I have skin in the game.
From an allocation standpoint, I have put in about 1/5th to 1/10th of my total potential allocation to the energy sector depending on how this plays out. By having a position where I could get cut, I am forced to educate myself on the current market forces. As a wise man said, "Picking a bottom only gets you sticky fingers." I try not to pick bottoms. I seek value in income through dividends and growth by stock price appreciation. I see certain companies within the energy sector as poised to generate both.
Why Conoco Phillips? It is the largest independent Exploration and Production (E&P) company in the world. It pays a solid dividend (4.68% as of December 12th close) with a 15-year history of increasing dividends. It is trading at a 52-week low and offers $24 upside once the current glut works through. Conoco Phillips has a reputation for managing its balance sheet and a better than average safety record (although Chinese litigation is currently underway).
Do I think Conoco Phillips might go down in the near term? Yes, I think this a real distinct possibility and, as it goes down, I will add to my position. I can afford to allow the price to go down further while collecting my 4.6% dividend as I wait for the market to readjust. This 4.6% is better than cash and has more upside than cash.
Why invest in oil in general? Because $58 oil is not sustainable long term. Russia, Venezuela, Iran and, well, many of the U.S. shale oil producers cannot meet their obligations at $58 a barrel. Many state that the natural/profitable zone is above $70 and much closer to $80-$100 a barrel. Should $58 a barrel oil or even lower remain the market price for some time, it will eventually bankrupt the weak players. Once this occurs, the supply demand equilibrium will reset and probably overshoot to excess demand scenario, which is why I believe now is the time to begin accumulating energy stocks.
Additionally, oil demand is inelastic and runs the global economy. This will not change in the next 10 years. This pushes the problem to the supply side. Supply must decrease to get back to profitable oil. This will require players to voluntarily curb output or go bankrupt and cut off supply. This will play out over the next 6-24 months. Once supply is choked off, either voluntarily or through bankruptcy, the supply demand equilibrium will readjust to a point where demand exceeds supply. The price of oil and their stocks shall rise with it too.
I have made a case for the energy sector, but why is the energy sector more attractive than Apple? For me, Apple is still attractive and I plan to keep at least 50% of my total holdings, however Apple has had a tremendous run in the last year (up over 35%). Apple's size makes it difficult for the company to deliver 35% in it next year. No it is not my opinion, it is simple math. $643 billion *1.35 = $868 billion. This is a $245 billion increase in market cap.
Additionally, I would offer that Apple is fairly valued at this point. Events that would change my opinion would be an Apple TV with 4K gaming and movie support and a tax repatriation holiday of overseas profits. I see Apple TV as a possible 2015 event, but do not anticipate any tax holiday until 2016 or beyond. In absence of either of these two events, I see Apple's potential growth closer to 10-12%, excluding the dividend. There's more potential upside in the energy sector.
Should COP retrace its 52-week high of 87.09, it offers $24.64 upside to Friday's closing price of $62.45. This is just over 39% upside potential just to retrace back to its 2014 52-week high. Lets say it takes two years for this supply and demand curve to rebalance. This position will net 24% profit each of the 2 years. (39% retracement+ (2) 4.68% dividends)/2. I believe this is a lower risk/higher opportunity trade than Apple at today's price.
At the current price points + higher dividends, many oil and gas companies are a better buy than Apple at current prices. I chose Conoco Phillips as my stock to enter this sector and plan to add to this position over the next several months. Apple is still a great stock and if one does not own I would recommend that one considered buying. I am grossly overweight Apple and need to trim my holdings. I believe that my best money today and in the near future is placed in the correcting energy sector.
Let me know your thoughts and Happy Investing!
Disclosure: The author is long AAPL, COP.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.