The secret to making money by speculating in oil is easy: just buy at the bottom and sell at the top (a formula that also should work for stocks, collectible cars and sub-prime mortgages).
However, since I have more column inches to fill, it’s only fair to point out that I don’t know how to find the bottom or top of the oil market. Neither does anyone on any of Wall Street’s trading desks, nor anyone in the commodities pits, nor any of the talking heads on TV. Sure, once the bottom is in and prices have returned to equilibrium, I will be able to use my handy-dandy Fibonacci, Gann or Elliott Wave tools to “magically” draw an arrow pointing at the low point on the chart, but until then your guess is as good as mine or anyone else’s.
When asked how he was able to call the 1987 crash with such precision, hedge fund manager Paul Tudor Jones replied that it would be fairer to ask how he caught the move on his fifth try. Even the best and brightest in the business don’t have a crystal ball. The closest I have been able to come to catching commodity price trends is by doing the opposite of whatever Goldman Sachs Group Inc. (GS) is recommending. When they were cheering on oil to $130, it was time to sell. Now that they are forecasting oil at $35 for the foreseeable future, I can’t help but start to think that higher prices are inevitable.
Data Points to Growing Demand for Crude
I don’t really need to fade Goldman Sachs, of course. All I need to do is look at the growth in worldwide energy consumption over the last fifty years, and projected population growth and per capita GDP for the next fifty years. There are going to be a lot more people. A growing number of those people are going to demand the energy consumption that goes with an industrialized lifestyle. I don’t know what the bottom in oil will be, and I don’t know for how long it might last, but I am sure that oil will be higher in the future than it is today.
So, how to play this expectation of higher prices in oil? Since we don’t know when, we might have to sit in this investment for a significant period of time. It should be no surprise that I recommend buying into high-performing energy companies selling at attractive prices. It’s really three benefits for the price of one. You get your primary goal of gaining when oil prices increase and these companies increase their gross margins. But you also get the earnings growth and reinvestment in their businesses while you wait, not to mention that you get a reduced tax bite on both dividends and any long-term capital gains.
So here are eight energy companies you might consider if you are looking to add oil & gas exposure to your portfolio (disclosure: our funds currently hold investments in both Marathon Petroleum Corporation (MPC) and Valero Energy (VLO)):
Alan Stevens is Managing Director of Research and Portfolio Management at Lyons Wealth Management LLC, a Florida-based subadvisor to several mutual funds. He serves as Portfolio Manager for Catalyst/Lyons Tactical Allocation Fund and is Co-Portfolio Manager for Catalyst/Lyons Hedged Premium Return Fund. He also manages several separate managed account strategies and alternative asset funds, including Lyons Tactical Overlay Program. He holds his MBA from Harvard Business School and a BA from Lake Forest College.