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Nearly 20 years ago, when I worked in Chicago, I became friends with a gentleman named Joe Lopresti. Today, Joe is the President of Arlington Capital Management. We’ve remained in touch and share our thoughts and outlooks on the market periodically.

Joe recently put together some extremely compelling — and well written article why investors ought to consider taking a look at oil stocks at the present time. Here are just a few of his thoughts:

Joe pointed out four specific oil stocks that have recently reported some pretty impressive numbers. The earnings for these four stocks were up 45%, 69%, 136% and 178% over the same period last year.

More importantly, all four of these companies are seeing their earnings grow at rates that are multiples (yes, multiples!) of the growth rate of the typical S&P 500 stock.

And yet these four companies all trade at a PE ratio that is at or below the average S&P 500 stock.

Now, here’s the rub: over the last 60 days these four stocks (along with the entire sector), are down an average of 35% in price.

Some of you may be thinking… “sure, but if oil is dropping, won’t the earnings for all the oil stocks also drop?” That is quite possible, but bear in mind that while oil has dropped — it is only back to the same prices we saw just three months ago.

Question: how many people do you know have quit their day job to start day-trading oil futures? And how many reality-TV shows can you find today discussing how much money you can make speculating in oil?

Not many. But yet, when Internet and technology stocks exploded a few years ago, people quit their day job to day trade stocks. And I’ve lost count of all of the “flip this house” television shows launched in the last few years.

We are nowhere near “an oil bubble” as the media would tell you… or wants you to believe.

Another point Joe made: a true sign of a bubble is when Wall Street cranks out IPO after IPO… and each new company has worse fundamentals than the previous one. Remember pets.com? When Internet companies were going public, there were no revenues, no earnings, no profits… many companies had no sales! There are very few (if any) oil companies going public at the present time.

This is no bubble.

One final point that Joe makes to quash the “bubble” theory: there are plenty of stories suggesting that “speculators” are behind the massive rise in oil and oil futures. The folks spinning these rumors are neglecting one important fact: when oil futures contracts expires, someone has to take delivery of the physical product.

What port do you want your barrels delivered to?

I agree with Joe: some of these companies will make spectacular investments. I do not believe, however, that today is the day and we want to step up and buy these things. I’d rather wait for the relative strength to improve and to see some buy signals before committing money.

What are your thoughts on the recent drop in oil?

Is this a buying opportunity…or the end of a bubble?

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