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Is Now the Time to Buy Oil Stocks?
by Jamie Dlugosch
I have an unabashed bias to the fundamental value school of investment management, but I'm not a blind devotee.
I know the shortcomings of value investing and as such, I try to make certain tweaks to my approach.
For starters, the biggest risk in value managing is buying stocks that are in the midst of some sort of major corrective move lower.
Some call it "catching a falling knife." With value stocks the risk is always there that your cheaply priced trades can get even cheaper if you are not careful.
In my proprietary model run at the end of each month there are always suspects versus prospects.
By suspects, I mean stocks that have the potential to continue to decline in value.
They are not easy to identify, but some basic precautions can steer one clear of these potential disasters for your portfolio.
One of the tricks I follow is to simply let the dust settle. Whatever the cause for a move lower, it is often best to let some time go by before dipping your toes in the water.
Rarely is it a good idea to go bargain-hunting while the bargains are still coming.
The crude oil debacle puts this approach to the test.
It would be incredibly tempting to buy oil stocks with crude plunging below $80 per barrel, but I'm just not sure now is the right time.
With firms like Goldman Sachs expecting further declines, the dust has yet to settle here.
One investor who is undeterred is hedge fund manager Andreas Halvorsen.
Having previously worked under noted value investor Julian Robertson at Tiger Asset Management, this so-called Tiger Cub is upping his stake in oil stock Pioneer Natural Resources (NYSE: PXD).
Halvorsen's current fund, Viking Global, in a recent filing said that it held a 4.7% stake in Pioneer. The passive investment is a clear endorsement of the domestic and global oil boom, irrespective of the move in crude prices.
It's hard to argue against Halvorsen. His impressive track record suggests that he knows how to avoid falling knives.
Still, I suspect there might be a better entry point down the road.
If indeed oil prices fall further, stocks like Pioneer have room to fall further.
If there is one name to consider for a domestic oil boom play, I might be tempted to dabble in U.S. Silica (NYSE: SLCA).
The discounts here are more compelling as compared to Pioneer and its importance to the fracking industry is undisputed.
Ultimately, buying stocks in the midst of a major industry change is tricky.
My preference is to be a bit more conservative, but that doesn't mean I'm not willing to take a shot.
Just don't get carried away with it.
Over the long term oil prices are indeed likely to recover and the oil boom domestically is only in the early innings of an impressive growth period.
Jamie Dlugosch Editor Investor Research Institute
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