As the price of oil surges through US$117 a barrel, we make one of our biggest calls yet – triple digit oil prices are here to stay.
Whilst that may be bad news for motorists and frequent flyers, it means some of our favourite smaller oil stocks offer even more compelling value, including two we highlight below.
But you might have to be quick…one of our favourite coal stocks has already surged 67% higher in just 2 weeks.
Dear Contrarian Stock Market Investor,
This week’s surprising fact is that the Dow Jones Industrial Average is down only 3.4% in 2008. And here was everyone thinking the
Back here in
· Monday saw the S&P ASX 200 Index jump 171 points or 3.1%, its 6th largest one-day percentage gain in 2008.
· The S&P ASX 200 Index is still down 11.7% in 2008.
So much for the saying “when Wall Street sneezes,
You could be forgiven for thinking it’s just not fair.
The words of George Bernard Shaw spring to mind…
“Life is not meant to be easy my child; but take courage: it can be delightful.”
Stock market investing can be both an uplifting and demoralising experience. One day, when share prices rise, particularly when one of your smaller companies jumps 10% or 20% in one session, you are in heaven, feeling like an investing genius.
The next day, stock prices fall across the board, dragging down the good with the bad, and dragging you into a state of despair.
But, as the great Warren Buffett once said…
"The most important quality for an investor is temperament, not intellect.”
Remember…
· All stock market investing should be over the long-term.
· In the short-term, as we have seen from the divergence in the
· The best investors take advantage of short-term irrationality in share prices to buy high quality companies at cheap prices.
Put another way, and continuing Buffett’s quote above...
“You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."
As you’ll see a little further down, we remain firmly of the opinion that the continuing disconnect between commodity prices and resource stocks offers some very compelling investment opportunities.
However, you may have to be quick.
The Coal Stock Whose Shares Jumped 67% in Just Over 2 Weeks
For example, remember the small
At the time, we said…
“We also think we’ve found another key winner, one that happily flies under the radar of most of the resource investment community. At a market value of around $260 million, compared to BHP’s $225 billion, we think it’s just a matter of time before this small
…we currently rate this company as a BUY, having done so since mid December, in which time the share price has hardly moved. But that may be about to change, given the threefold increase in the price of coking coal.”
On April 4th 2008, the shares traded at 57 cents. Fast forward to Monday this week and the shares closed at 95 cents, meaning they’ve soared a staggering 67% in just over 2 weeks!
This share price performance succinctly highlights 3 attributes that are key to long-term investing success…
1. In the short-term, even if you think you’ve found a compelling investment opportunity, it may take some time for it to be recognised by a rising share price. As ever, patience is required.
2. Share prices can rise very quickly and somewhat unexpectedly. Trying to time your buys and sells is a futile exercise – you’ll have a good chance of missing out on the best days and weeks.
3. There is no guarantee the share price of a cheap company cannot fall even further. But only in the short-term. In the long-term, value is always rewarded.
A little further down we highlight two smaller oil companies that are trading at significant discounts to their implied valuations. One jumped 12% just last week, but still remains 45% below its October 2007 peak. The other is already up over 900% since we first recommended it as a buy, yet we think its best days may still be ahead.
But first, a word on oil.
US$100 Oil Prices Are Here To Stay
The real excitement in recent weeks has surrounded the oil price.
Many resource sceptics believed that the sharp pullbacks in commodity prices a few weeks ago signalled the end of the resources bull market. In oil's case, bears were expecting a hasty retreat below the psychologically important US$100 a barrel mark.
Instead, just a few weeks on and oil has in fact broken to fresh all-time highs, with prices reaching a record US$117 a barrel early this week. In our view, triple-digit oil prices are here to stay.
As regular readers will know, we’ve long been bulls on the oil price. But don’t just take our word for it….
As recently reported in the Australian Financial Review…
“Barclays Capital has put a rocket under its long-term oil price forecast, predicting the price of the black gold will average US$137 a barrel until 2015, up 44 per cent on its previous estimate made 18 months ago.”
Demand for oil is soaring worldwide. And the fast-growing economies of
In a recent CNBC interview, legendary
Then there’s the legendary investor Warren Buffett who in a recent interview also on CNBC said “…if we're going to use 85 million barrels a day now and the rest of the world probably is going to increase its demand in the next five or 10 years, we're going to have a tough time maintaining production that satisfies those at this price, even.”
Many Oil Companies Trade At Compelling Valuations
At the start of 2007, we re-iterated the view that we have held since 2001; that is, that the price of crude oil would reach US$100 a barrel.
As we noted previously these views were scoffed at by other 'market experts' on numerous occasions (whether all these can still be called experts following the sub-prime debacle is debatable). Investment banks for instance were still using US$30 oil prices in their valuation models a year or so ago.
And it seems they have still not caught up with the game completely. We note that many energy companies continue to trade at compelling multiples.
In our view the share prices of quality energy stocks will undergo a re-rating over the net 12 months, and play catch up once it becomes completely apparent that oil's membership of the US$100 club is for keeps.
All of which is good news for the two small oil companies we highlight below. But first, we attempt to answer the $64,000 dollar question on everyone’s lips…
Is It Safe To Buy Stocks Now?
One of the most popular questions we are asked here is whether it is safe to get back into the stock market.
Our stock answer is yes, but as long as you…
· Have a long-term investing perspective.
· Are buying the right stocks at the right price.
· Are avoiding the wrong stocks in the wrong sectors.
· Are avoiding excessive use of margin lending.
· Have a clear, understandable stock market investment strategy, one that you will continue to follow regardless of the day-to-day movements in the stock market.
· Can stomach 20% falls in the value of your portfolio whilst still sleeping well at night and not being spooked into panic selling at precisely the wrong time.
Then there’s our contrarianism, our ability to go against the crowd. When the stock market is all the talk at dinner parties, we become naturally cautious. On the other hand, when people are dumping the stock market in favour of cash or property, we become naturally bullish.
Which conveniently brings us onto…
The Two Big Flashing Buy Signals
Buy Signal #1
Last weekend, The Australian Financial Review’s Smart Money section lead with an article titled “Preserve Your Wealth”. The article featured five ways to preserve your wealth, including a cash fund, a cash-enhanced fund and bonds.
We make no criticism of the AFR, because as usual it is a very good article, but when we see the mainstream press featuring cash and bonds as investment options, we instantly see it as a sign that it is a good time to be buying shares.
Individual investors have an uncanny knack of buying shares at the top of the market and selling them at the bottom. When they sell, often booking a hefty loss, they usually sit on the sidelines during the market’s inevitable recovery, only buying again after the market has jumped significantly higher.
Don’t do it.
Don’t follow the crowd.
Having seen the stock market dive 18% from its November 2007 peak, the battered and bruised investing crowd is now considering investments in cash and bonds.
If you think about it rationally, it doesn’t make sense.
If people thought BHP Billiton was a buy back in November last year when the shares peaked at close to $48, AND since them commodity prices in general have risen, why wouldn’t they have been buying more BHP shares at the cheaper prices on offer?
We don’t follow the crowd. For example, in the midst of the January 2008 stock market mayhem, we rushed a special BUY alert email to our Members, recommending they buy BHP Billiton. At the time, the shares were just $31. This week, they traded at $44, up over 40% in just 2 months.
Enough said.
Buy Signal #2
As we said above, commodity prices in general have risen, yet the share prices of many resources stocks have fallen along with the rest of the market.
We believe some of the ‘disconnect’ has occurred because people have been selling resource stocks because they had done well in the past. Investors love booking a profit and hate booking a loss.
Anyone who has held resource stocks for the last couple of years has likely done well. They would likely be sitting on some nice profits. But because of the market turmoil, some forced selling due to margin calls and Opes Prime/Lift Capital related selling, people have dumped perfectly good companies, booking profits.
When having to make a forced sale, it is psychologically easier to sell stocks that have done well rather than sell stocks that are in the red. This has inevitably driven down resource company share prices.
Oil price – up over 45% since October last year.
Gold price – up almost 23% in the same period.
S&P ASX 300 Resources Index – virtually unchanged.
Now obviously the S&P ASX 300 Resources Index is made up of stocks other than oil and gold, and for sure, the share prices of some oil and gold stocks have fallen for perfectly valid reasons.
But as a general indication of the ‘disconnect’ between commodity prices and resource stock prices, we think the numbers above paint a pretty indicative picture.
In a perfect world and an efficient stock market, the share prices of resources companies would largely follow the underlying prices of their respective commodities.
But we don’t live in a perfect world, and at times (like now) the stock market can be inefficient.
To us, it all adds up to a buying signal for specially selected resource stocks.
Good Things Come To Those Who Wait
Take the small oil company we told you about last week.
As a reminder…
· The company is budgeted to produce around 300,000 barrels of oil in 2008, with profit margins after all expenses over US$50 a barrel. That translates into budgeted profits of around $16.5 million.
· As well as the potential to further develop its existing oilfields, the company has further growth potential from two identified opportunities. One has the potential for one million recoverable barrels of oil, the other a massive 25 million recoverable barrels. There are significant other growth opportunities too.
· The company is profitable, has no debt, has $11 million in cash, and is planning on drilling 15 more wells in 2008. It has a respected management team with hundreds of years of collective oil industry experience.
· Today the company is trading on a price to earnings ratio of just 4 times, making it one of the very cheapest oil stocks on the market. If that’s not enough, the company themselves think their own shares might be worth around $1.55, more than 300% above their current share price.
In our most recent update to Members, we said…
“When we last covered it we thought the company was a bargain-priced entry then, but over the past few months the story has advance significantly and become more attractive. In the meantime the company’s share price has halved, making the company extraordinary value in our opinion. When will the market wake up and smell the coffee, we ask?”
Well, perhaps the market is finally waking up to this bargain priced oil producer. Last week its shares jumped over 12%. But that still leaves them 45% down on their October 2007 share price…
Oil price – up over 45% since October last year.
Share price of small oil producer/explorer – down 45% since October last year.
In anyone’s language, that is a disconnect.
In our language, this small oil company offers extraordinary value.
Remember, as we said above, value is always rewarded. You just don’t know when. But if you are not in it, you can’t win it.
Our Best Ever Recommendation To Date
Picking the right shares is obviously the key to making your stockmarket riches, and that’s where we think we can help you.
We generally focus on smaller companies – they are often over-looked and under-researched, allowing us to find companies with outstanding prospects, yet valued at a fraction of the price of larger companies.
Some of our very best past recommendations have been smaller companies.
Take the small oil company that is already our best ever recommendation. The company typifies exactly what we are looking for when we search for stockmarket hidden gems.
We first recommended the stock as a BUY to our Members back in February 2006. At the time, the share price was a lowly 5.4 cents and the total company was worth just $17 million.
This was your typical under-researched small company. The share price had gone nowhere for the previous two years. As far as the market was concerned, it was a corporate basket case, a perennial under-performer, destined to spend the rest of its days stuck in penny share land, going nowhere fast.
But we noticed things were changing for the better. In our initial report in February 2006, our special buy email alert to Members said…
“Over the past 12 months, key board and management changes have occurred that indicate exciting times ahead for investors. The company now has all of the key foundations in place for success – a dynamic board and management team, a solid producing oilfield in
The Cheap Tiny Company That Struck Oil
We also had the opportunity to meet with the company’s new Chairman and Chief Executive Officer to hear first hand about their plans to reinvigorate the company. Crucially, these two men had extensive mining sector experience, something we always look for with junior mining and resources companies.
Finally, the company was cheap, based both on its underlying oil assets and our positive view of the oil price. We concluded our BUY report by saying…
“The company’s market capitalisation is modest by industry standards, particularly given the quality of its board and management team, and its level of drilling activity. We believe the share price downside is limited and we recommend the company as a Buy to all Members around 5.4 cents.”
How You Could Have Turned $20,000 into over $200,000
Fast forward to now, and the share price of this oil company is around 55 cents.
For Members who bought at 5.4 cents, at 55 cents they’d be sitting on a profit of over 900%.
To put that into perspective, an investment of $20,000 would now be worth a quite unbelievable $203,703.70.
For those of you not lucky enough to have bought at 5.4 cents, or at other share prices significantly below the 55 cents the shares trade at today, you might be thinking you’ve missed the boat.
We beg to differ. There’s a stock market saying that you should cut your losers and let your winners run.
In the case of this small oil company, that strategy has been hugely successful to date. But rather than thinking investors have missed the boat, we think the best days for this company could still be ahead of it.
Even after the huge run up in its share price, the company is still only worth around $366 million, giving it the potential to grow into something much bigger.
We Upgraded This Oil Company To A BUY Just Last Week
In fact, so confident are we in the company’s future prospects, just last week we upgraded it to a BUY, our only new buy recommendation of the week.
Why?
· Last week they released a report by oil industry experts showing an upward revision of more than 300% in the company’s Thai oil reserves.
· Their attributable total 2P oil reserves (Proved & Probable) now stand at almost 11.4 million barrels. Total 3P reserves (Proved, Probable & Possible) are in advance of a staggering 45 million barrels of oil.
· We conservatively calculate the in-ground value of the company’s Thai oil reserves at 80 cents a share, some 45% above the current share price.
· There is more good news too in that the company is looking to accelerate its drilling programme for 2008 – we anticipate further details in the coming week.
· We concluded our Report by saying “…for Members with no current exposure we believe now is the right time to buy, and we recommend the stock as a Buy around 55 cents.
Searching For More Great Small Resource Companies
As we said above, some of our very best recommendations have been smaller companies.
For example, each of these companies was initially recommended to Members when they were worth less than $30 million. Just look at the stunning gains they’ve racked up since…
The Small Oil Company Mentioned Above – Up an amazing 919% in a little over 2 years!
Terramin
Platinum
(Share prices taken on Monday 21st April 2008. Gains don’t include dividends.)
Don’t just take our word for it. Wilson Asset Management principal Geoff Wilson was recently quoted in the AFR as saying some “exceptional” opportunities have presented themselves, particularly in the mid-to-small company sector.
“I am more excited about the next 12 months than I have been in the last two or three years.”
With the share prices of some of our specially selected small resource companies shooting higher in a matter of days, we urge you to act now in order to access our current recommended stocks.
We wish you happy and profitable long-term investing.
P.S. As we’ve said previously, we think the world is experiencing a once-in-a-century boom via
P.P.S. Bank of New York Mellon Corporation chief economist Richard Hoey was quoted in the Weekend AFR as saying “No one has a shorter-term time perspective than a hyper-leveraged investor with one hour to meet a margin call, which has created opportunities for those with a longer-term perspective.” We couldn’t agree more.
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