Marketocracy: "The Energy Story"
09/16/2005 12:00 am EST
"Understanding the energy story is central to setting your strategy for the rest of the year and probably next year as well," cautions Ken Kam, of Marketocracy. Here, he offers a long-term outlook for energy as well as a few ideas for investing, post-Katrina.
"It’s hard to imagine that just six months ago the price of oil fell to $40 per barrel and media commentators speculated about how low the price could go. The market is now grappling with the reality that the world is facing a supply crunch as oil demand increases to fuel the world’s economic growth, particularly in China and India. In April, we warned that a supply disruption could quickly throw the market out of balance leading to much higher oil prices. Hurricane Katrina caused that disruption.
"Although oil prices have dropped back from the post-Katrina spike, we believe this year’s rise in the price of oil is not a short-term blip and we think it is far from over. Any weakness in Energy stocks caused by the release of oil from the Strategic Petroleum Reserve is likely to be short-lived and considered a buying opportunity. There is a shortage of refining capacity as well and Katrina reduced it further.
"At some point, Wall Street will recognize that oil prices won’t quickly return to ‘normal’ and accord energy companies p/e multiples that reflect their superior earnings growth over the past three years. In the meantime, oil industry insiders know their companies are undervalued by Wall Street. That’s why we saw acquisitions last month of PetroKazakhstan, our second largest position and Premcor by Valero, our fifth largest position. Don’t be surprised by more buyouts because it is cheaper and safer to acquire oil assets on Wall Street than by drilling.
"Tim Eriksen, one of our m100 members (our top performing stock pickers), made more money on PetroKazakhstan than any other member at Marketocracy. He now says, ‘After surveying the market, oil stocks still appear to be cheap. One higher risk play is Chaparral Resources (CHAR OTC BB), which is also based in Kazakhstan. The shares trade around $6 and the company earned $0.17 per share in the second quarter when Brent crude averaged about $52 per barrel. I believe CHAR could see third quarter earnings nearly twice what it earned in second quarter. A lower risk play on oil is Kerr-McGee (KMG NYSE). Its operations in the Gulf were not damaged due to Katrina. Wall Street seems to believe that the big gains for KMG have already been achieved, but I believe the story is only beginning to unfold.’"
We note that outside of the energy sector, Ken Kam sees another potential opportunity as a result of Katrina. He explains, "Many businesses will fall short of Wall Street’s expectations for this quarter as a result of Katrina’s impact. But, once the floodwaters recede, future quarters will look better. If your investment horizon is longer than one quarter, this may be a great time to load up on stocks that are temporarily depressed. One such stock is Wal-Mart Stores (WMT NYSE). As a result of Katrina, 18 Wal-Marts are closed and the stock dropped to its lowest level in almost 3 years and the m100—our top stock pickers— bought shares. I think Wal-Mart is going to do a great job of supplying food, water, clothing, and all the things people will need to reestablish their households. Wal-Mart’s stock rarely goes on sale but this is one of those times."