As I sit writing this piece, on Thursday afternoon in the US, I am looking at a screen filled with red and am reminding myself of the sage advice from the cover of “The Hitchhikers Guide to The Galaxy”…”DON’T PANIC”. I couldn’t find the “large, friendly letter” font that this should, according to the Hitchhiker’s Guide author Douglas Adams, be written in, but they are wise words nonetheless.
In fact, if you are to be successful as either a trader or investor, you should do as the denizens of dealing rooms do, and see any volatility as opportunity rather than a cause for panic. That, however, is one of those things that are a lot easier to say than do. We are all aware of Warren Buffet’s admonition to be “greedy when others are fearful”, but those of us old enough to have traded through 2000 and 2001 as well as 2008-9 cannot help but worry. The day traders among you will naturally see this as traders do; any movement, up or down, is a chance to profit. For longer term investors, however, they may be tempted to sell and sit out the next few days or weeks. That would be a mistake in my opinion.
In fact, if you think about it logically, particularly for energy investors, nothing about your base case for investing has changed. The world’s population is still growing and they are still demanding increasing amounts of energy, even as the companies that fill that need become cheaper every minute. Any weakness in those best placed to benefit from the big picture, namely large multi-national oil companies, should be seen as simply an opportunity to buy their stock at a discount.
In these days of 24/7 coverage of news in general and financial news in particular it is easy to exaggerate every problem’s potential to cause disaster. It wasn’t that long ago that Greece, for example was, according to some, about to cause the collapse of the world’s financial system. At that time, anybody predicting an oversubscribed auction of Greek government debt at all, let alone a 5 year bond with a yield under 5%, would have been seen as a lunatic, but that is what we saw this morning. When you look at what is happening now, bear that in mind.
This is not a drop caused by worries about either the US or the global economy. It is a correction led by sectors that have looked frothy for a while, such as biotech and social media stocks. When companies are valued based on the cleverness of their idea, rather than their ability to make money, problems will inevitably follow. It is likely that more speculative areas of the energy markets will be dragged with them as the general appetite for risk fades, but there is nothing to suggest that the demand for energy, nor the profits of the major players in that market, will be hit in any way. Today’s drop, while especially scary following a few days of volatility, is more technical than fundamental in nature. It may continue for a while, so I would favor averaging in any available cash rather than trying to pick the bottom of the move, but I firmly believe it is a time for energy investors to be buying, not selling.
If I have convinced you that the smart money will be entering the market as others exit, then the next logical question is, what should you buy? Suggesting purchases of huge multi-national companies, such as Exxon Mobil (XOM) and BP (BP) is hardly a sexy call, but at a time when risk is out of favor, it may well be a smart one. Think of it as building the core of your energy portfolio rather than as a trade for short term profit.
BP in particular is appealing to me.
The stock had been under pressure prior to this current bout of general market volatility, largely due to concerns about the company’s deep involvement in Russia, a potential problem explored in depth in this FT article. It is, I suppose, possible that this exposure could cause problems, but history tells us that it is far more likely that we will all have forgotten about it in six months.
Of course, Russia is not Greece and the potential problems are different, but a company with the size and scope of BP, at around 6.5 times trailing earnings looks like a steal to me and a chance too good to miss. You may prefer the less risky Exxon Mobil (XOM) if Russia really bothers you. That too is trading at a decent looking trailing P/E around 13, but the double whammy of geopolitical concern and market panic has left BP with significantly more upside, meaning that there are potentially good rewards for that extra risk.
Whichever path you chose, however, the important thing is to see this correction as just that, a correction. The bubbly valuation of biotech and mobile stocks has nothing to do with the fundamental case for investing in energy, nor with the potential profitability of that sector’s biggest players. What it will do is drag down the price of their stock, and for the investor who remembers the Hitchhikers Guide’ wise advice, that is just an opportunity.