Today is my birthday. I now have had a lot of practice with dealing with them and yet the melancholy...
Kam: Energized Gains
10/08/2004 12:00 am EST
Ken Kam runs an investor Web site called Marketocracy.com, which monitors over 60,000 online amateur portfolios. His Masters 100 Fund follows the advice of the top 100 of these stocks pickers. Here’s his commentary and latest stock ideas.
"One of the things we can be confident about in the market is that there are going to be changes in market leadership. When there are significant changes, such as what I think we have experienced this year, it can take us some time to find out who really has the great track records to help guide us in our stock picking for our mutual funds. It is not clear what parts of the market will offer outperformance in a rising interest rate environment. The economy was supposed to be so strong that the Fed needed to raise interest rates to slow it down. And the fact that they have raised short term rates – while long term rates are lower – is somewhat concerning. It seems to say that the economy really isn’t that strong and that maybe the soft patch that the Fed was afraid of early this year might actually be a long patch.
"Our process has steered us to energy stocks. When you look into the fundamentals of energy stocks, they are very attractive. At the moment, our portfolio is 25% in energy. You can invest in some of the biggest companies in this industry at 11 or 12 times earnings. Many of their business models are predicated on the price of oil hanging around the $25 a barrel range. That’s the mid-point of OPEC’s stated price band. Now, I think we would all be surprised if we average $25 a barrel this year. That would require quite a drop! I think it’s not likely that we will see prices in that range during the next year. So at least for the next year or so, all the companies that have sources of crude outside the Middle East are probably going to find that they get much more for their main product than their business model calls for and what most analysts expected at the beginning of this year. That’s why you can buy them at pretty cheap P/E ratios.
"At the same time, there are other factors that make the energy area interesting. There have not been many power plants built in this country in the last 10 years. In California, we’ve had power shortages. And the same thing has happened in refining capacity. People who own the downstream refining capacity – if the economy does pick up – are going to find that they are going to be more profitable. That is an area that we think offers good potential for the future - no matter what happens in the election. And that is our biggest sector weighting now.
"Two energy stocks that we find particularly attractive are Valero Energy (VLO NYSE) and Marathon Oil (MRO NYSE). Both of these stocks offer good diversification for a broad portfolio. For us, especially coming up to the election, one of the biggest risks is that there will be further supply disruptions in the Middle East. If this happens, Marathon Oil will probably benefit, because they don’t depend that much on the Middle East for their sources of crude. Valero has a distribution network and refineries. So if they economy does recover, they will find that what they produce will deliver higher margins than anyone is expecting right now. So there is still reason to believe that these companies will do well. And at the same time, you are buying them at 12 times earnings, so you are not really paying up for it.
"We would also point to to stocks that are being bought by the best performing stock pickers relative to the underperforming stock pickers. Atwood Oceanics (ATW NYSE) is engaged in the international offshore drilling and exploration of developmental oil and gas wells. For the last 3 months, the best performing investors held its position, and over the last two weeks the top group has bought heavily back into the stock. The 54% increase in the position was made at share prices ranging between $44.83 - $46.66. General Maritme (GMR NYSE). provides international seaborne crude oil transportation services with a fleet of 42 tankers. GMR has a market cap of $1.18B, a P/E of 8.76, and is currently trading at its 52 week high. In the last two weeks, the best investors have been net buyers of GMR, growing their position by 16% at prices ranging between $27.50 and $30.50 per share. Over the same 2 week period, the rest – those who have been underperforming - have decreased their holdings by 15%. This is the first major buy of GMR since the end of March, when the group increased their holdings by 50%.
"Meanwhile, we have recently added two additional energy names to our portfolio. Dawson Geophysical (DWSN NASDAQ) acquires and processes 2-D, 3-D, and multi-component seismic data used in analyzing subsurface geologic conditions for the potential of oil and natural gas accumulation. Industry demand due to rising oil prices has prompted Dawson to add its ninth seismic data acquisition crew. We've raised our investments in this company by 32% in the last twp weeks. Precision Drilling (PDS NYSE) operates in all aspects of the oil drilling industry, including manufacture and repair of equipment, oil field equipment rental services, and contract drilling. Higher Canadian drilling activity has allowed PDS to increase revenues by 16% as of the end of Q2-04. Precision Drilling is a new position in our portfolio, as we bought in during the last two weeks."
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