5 Great Summer Oil Trades

07/15/2011 7:30 am EST


Peter Way

Founder and CIO, Peter Way Associates

There are a few pockets of stocks where the traders go to find safe harbors when the markets are volatile, and Peter Way of Block Traders’ Oil & Gold Monitor shares a handful of market makers’ go-to picks.

For us, risk management is minimizing involvement with losers, and only one out of every six or seven is far better than most investors accomplish. The keys are:

  • astute selection
  • informed objectives
  • time management

We provide the selections and objectives by understanding what the best-informed investment players—the market makers and their big-money, fund-managing clients—anticipate. Then we limit the time for those anticipations to come to pass, to three months from the time of purchase.

The disciplines necessary are:

  • don’t think you know more than the pros
  • don’t get greedy when a target has been reached
  • don’t hope for something to help if it hasn’t happened in a realistic time

This is what we call time-efficient investing.

Here is what the market makers think their big-money fund clients, when not on the beach, are likely to do with energy and precious-metals stocks over the summer.

Several independent exploration and production companies are now attractively priced. When hedgers have sought in the past to protect themselves against unwanted price moves in the way they are right now, some highly desirable price moves subsequently evolved.

Carrizo Oil & Gas (CRZO)
Carrizo has a long history of successful market-maker and prop-desk forecasts.

Its typical price performance, in the three months following forecasts at the current level, is an average gain of 14% in the roughly three-quarters of days where the closing price was above the buy recommendation, cost, and an average drawdown of 12% the rest of the time.

In nearly four years, CRZO has had forecasts at least as attractive as the present in more than 400 market days, or more than 100 a year. That frequency justifies looking at annual rates in less than full-year periods as a practical matter.

Continental Resources (CLR)
This pick also looks good to the market-making crowd. It illustrates an additional dimension (risk potential) to be considered besides the gain prospect found in CRZO.

With an upside forecast of three times its downside, a +13% sell target, past drawdowns of only 4%, and gains in 80% of the next three months of days following such forecasts, CLR is better on our risk-reward scale than 94% of any alternatives.

Gulf Island Fabrication (GIFI)
Gulf Island is a builder of offshore drilling platforms. Market makers now behave as though they see its stock’s price within the next three months as much as 18% higher.

Similar prior buy actions have been followed by average gains of 33%, with drawdowns of 7%. GIFI on a risk-reward scale ranks above 98% of all stocks.

Lufkin Industries (LUFK)
This company manufactures pump jacks and other oilfield equipment. Lufkin has a current implied upside forecast of 11%, prior price gain experiences averaging 18%, and drawdowns of 10%. Its experience from these forecast levels outdoes 88% of other current stock prospects.

World Fuel Services (INT)
World Fuel is a logistics provider, principally to the ocean oil-transport community. It is presently appraised by the professional investment community as a rarity, more attractive than they have seen it in only 12 days during the past four-and-a-half years.

An upside sell target of 19%, with past gains typical after such forecasts of 24%, make the drawdown exposures of 6% almost to good to be true. The hooker, if there is one, is that the modest drawdowns are present almost half the time, making it important to be watchful when a sell target is reached.

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