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I ran into a blog reader in a parking lot today who commented that I only favour the short side in my blog. He asked me if I was negative on the market and I have to admit that I am. Interest rates are rising or at least not falling in both the US and Europe. China has a bubble to contend with and I hear analysts saying Brazil is cheap at 18x. We have commodity prices at all time highs and the art market is sizzling, with long term investors saying it is time to stay away. For bargain hunters like myself, there are few places to find what I am looking for. One of the areas that I have been looking at recently is the oil patch. Industrial growth is likely to push oil prices higher and natural gas has been in a slump for some time due to Amaranth, high inventories and a hurricane season that didn’t materialize to the extent expected. It is easy to find natural gas producers trading at 6-8% yields and price to cash flows of between 2 and 4% and sometimes even both! These are the juicy tidbits that I like to find. I have noticed that every couple of years oil and gas stocks have a period when multiples contract even though high commodity prices are being sustained as the stock prices fall and interest wanes. People have a hard time owning these stocks all the time, especially gas stocks, which are seasonal. This year there are other factors such as inventories that have to be worked off and a late drilling season due to a late spring in Alberta. This is a period when people get used to $60 oil and come to see it as the norm. It was only a few years ago that $60 oil would have scared the world. Some of us believe in $100 oil and that’s why I like oil and gas stocks – great cash flow, high yield and a rising commodity price. I think that the focus in the stock market has been in only one place, base metals – this has been the only game in town for the first 6 months of this year. Portfolio managers have scrambled to buy mining assets at higher and higher prices. The energy sector has somewhat been forgotten in the frenzy and that’s why I like it. The income trust debacle hasn’t helped, except to create bargains for bargain hunters like me. When I come across something like this I am always surprised. It is simply due to the short termism in the markets. Many players want to wait until the hurricane season starts or later in the summer before making their purchases. It is like a game of Russian roulette – as a portfolio manager you can’t make your bet until the timing is just right or you will underperform. So, PM’s wait until performance starts in order to buy. Then they all rush in. We buy earlier. This is a slam dunk. Our favorites are the gas stocks and the drillers.
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