Based on the sharp drop in oil prices that has severely impacted quality oil majors as well as the continued fallout from coronavirus, I recommend you take the following actions:
Sell Rio Tinto (RIO)
Sell Cosan Ltd. (CZZ)
Buy British Petroleum (BP)
I had already sensed an opportunity in big oil over the weekend and wrote an article that will appear on the Cabot website in the coming days.
I share it with you below – you will notice that it does not mention BP. I will explain further why I selected BP in the next issue of the Cabot Global Stocks Explorer.
Big Oil, Big Opportunities
How does he do it? Warren Buffett says he realized he was going to be rich very early on in his career. It was during his honeymoon out west that he figured it out:
“When I visited the casino and saw all these smart, well-dressed people participating in a game with the odds against them, it was then that I realized I won’t have a problem getting rich!”
Buffett realized that Wall Street works the same way.
“There seems to be some perverse human characteristic that likes to make easy things difficult,” he says.
So Buffett did the opposite. He looked for companies trading at steep discounts to their real value. He did his homework, made sure they were financially strong, with positive earnings. Then he bought them, waiting for the market to recognize his foresight.
Buffett’s record using this strategy is mind-boggling. Over one 13-year period, for instance, he averaged an annual gain of 29.5% without even one losing year.
Buffett learned value investing from his professor at Columbia University, Benjamin Graham, who wrote the bible on value investing and put it to work on behalf of his clients, summarized in his firm’s 1946 shareholder letter:
"(Our goal is) to purchase securities at prices less than their intrinsic value... with particular emphasis on purchase of securities at less than their liquidating value.”
Throughout this century, value stocks have done very well but over the last decade, growth stocks have been decidedly winning the popularity contest.
Today, we find ourselves in the latter stages of a bull market, making investors a bit nervous.
But all the evidence shows that investors should stay calm and keep invested in stocks. One strategic move might be to shift a bit towards value investing. But you need a strategy to avoid the “dead money” trap.
Avoid the “Dead Money” Trap
By purchasing shares worth less than the hard assets the company holds, you give yourself huge upside potential with limited downside risk.
But you need to do your homework and evaluate a company’s financial situation and understand just why a stock is trading below its real value.
The next step is to figure out what events will “unlock” this hidden value. You need to find and confirm several catalysts and then see the stock begin an uptrend – to begin to bounce – before buying again.
The oil sector is perhaps the best near-term opportunity for value investors.
With concern about the global economy slowing, oil prices have come back sharply. In addition, Russia has rejected OPEC’s recommendation of making new production cuts through the end of this year to offset the impact that the COVID-19 coronavirus outbreak is having on oil demand.
As you might expect, big oil stocks have retreated considerably, offering you a number of targets such as Chevron (CVX), Exxon Mobil (XOM) and Royal Dutch Shell (RDS-A).
Chevron is perhaps the most expensive of the three but the company paid almost $13 billion to shareholders last year on free cash flow of $13.2 billion.
Exxon, which is still a cash machine, has been spending more aggressively than competitors on increasing production and offers a 7% dividend yield.
Royal Dutch Shell is a super major that has ambitious plans to steadily increase its footprint in green energy while it continues to leverage its production in the Permian Basin and is currently negotiating with privately held Endeavor Energy to acquire another 64,000 barrels a day of production.
Finally, I’m researching another global oil and energy leader that offers perhaps the best upside and blended strategy gaining from the continued dominance of oil in transport while capturing the growth of green energy.