Today we start with a discussion of oil prices, starting with this chart, published in January 2015, which shows that oil prices, after building a long plateau in the $110 per barrel range, plummeted to $50 per barrel in late 2014.
At that point, the brilliant minds at Goldman Sachs, armed with all the fundamental data a researcher could want, forecast that oil prices would rebound to $85 per barrel by June 2016.
At the same time, the average analyst surveyed by Bloomberg was predicting that oil would be at $82 per barrel by June 2016.
And the futures market was predicting $59 per barrel by June 2016.
Well, we’re not at June 2016 yet, so technically, none of these predictions are wrong.
But I daresay very few of the predictors were expecting oil to fall to $30 per barrel by the end of 2015—which is exactly what it did.
And when it did, these brilliant minds, chastened by the beating they had taken—and perhaps guided by upper management who warned them not to be so sanguine again—took the other tack.
In January 2016, Morgan Stanley analysts released a statement reading, in part, “Given the continued U.S. dollar appreciation, $20-$25 oil price scenarios are possible simply due to currency—the U.S. dollar and non-fundamental factors continue to drive oil prices.”
At the same time, the brains at Goldman Sachs were saying that oil could drop below $20 per barrel, as storage capacity filled and producers had no market to sell their oil into.
Now, I’m just one little guy. I don’t have near the research power that the experts at those firms have. But when I read those statements, I realized the big guys had capitulated. And my long history of market observation tells me that when investors capitulate, and everyone takes the negative view (and therefore there is no one else left to sell), the buyers will take control and price trends will reverse. So, on that basis alone, and ignoring the fundamental facts, I wrote the following on January 25, when the price of oil was still $30 per barrel.
“When everyone thinks alike, everyone is likely to be wrong” is one of my favorite contrarian guidelines. In the case of oil, I’ve seen so many headlines predicting oil at $20 a barrel (Citigroup and Goldman Sachs are among those jumping on this bandwagon) that I tend to think they’re wrong, and that oil will bottom well before then. Yes, the experts at those companies are often skilled at fundamental analysis, but I’m talking psychology here. Plus, ask yourself how good they were at predicting oil’s plunge to $30 a barrel.”
Well, maybe I was lucky, but the fact is that the price of oil bottomed just four days before I wrote that, and just after those experts were giving their bleakest assessments—and it’s been firming up since.
Even so, the experts at Citigroup, not trusting the nascent rally, on February 9 noted that $20 oil might still be in the cards due to an oil glut, with analyst Edward Morse commenting, “The recent rally in crude prices looks more like a head fake than a sustainable turning point.”
Since then, oil has surged from $32 to over $40!
So what can we learn from all these oil price predictions?
1. Fundamentals will win out in the long run, but in the short run, they are frequently trumped by emotions and psychology.
2. Investors are always looking ahead (today they’re looking at shrinking oil production).
3. Whenever you see everyone agreeing that one course is certain, you should take time to consider the fact that they might be wrong.
So, what’s next for oil?
I’m fairly confident that we’ve seen the low for oil. We’ve had a good rally, and now there’s fundamental evidence to support that rally, as rig counts have been falling rapidly. Plus, I have a hard time imagining that sentiment on oil will get as low as it was late last year, given that production is slowing.
Thus I’m alert to investment opportunities in oil stocks, should any come along that meet Cabot’s criteria.
Trouble is, it’s hard to separate the wheat from the chaff today, given that the group is just crawling out of the basement.
Schlumberger is a high-quality oil service company that’s been around since 1926. Management has been through plenty of good and bad times. But they’re not just survivors, they’ve actually earned a profit in every year of the past decade!
Last year, revenues at the company fell 27% to $35.7 billion, while earnings fell 40% to $3.37 per share.
But that’s history, and today, as the chart shows, investors are looking forward to better times.
Still, SLB is trading 38% below its highs of August 2014, which means there’s plenty of upside left.
Plus, the stock yields 2.7%—and that dividend is solid.
But where do you buy?
As readers of Roy Ward’s advisory know, price matters. In fact, Roy recommends that you never buy a stock unless it’s selling below its Maximum Buy Price. That price, of course, is calculated using 44 separate factors, ranging from earnings estimates to the stock’s beta, to its historic PE ratio to technical strength.
When a stock is selling above Roy’s Maximum Buy Price, it’s a bit too risky to buy. But when a stock is selling below Roy’s Maximum Buy Price, you can invest with the assurance that you’re insulated by a Margin of Error. You know you’re not overpaying for the stock.
So, if you’re interested in SLB, you could just buy the stock here, but the prudent move, if you really want to invest intelligently, is to become a regular reader of Roy’s Cabot Benjamin Graham Value Investor, learn the Maximum Buy Price of Schlumberger and other high-quality stocks, and make a habit of never again overpaying for a stock!
Since inception on 12/31/95, Roy’s Value Model has provided an impressive return of 1,060.9% compared to a return of 531.0% for Warren Buffett’s Berkshire Hathaway! During the same 20-year period, the Dow has gained just 222.8%.
Chief Analyst, Cabot Stock of the Month
and Publisher of Cabot Wealth Advisory