So far, this earnings season is unfolding similar to the previous three quarters of 2014. Companies are typically only beating on one financial metric—but this quarter, that metric is earnings, not sales.
2015: Flat or Down Year in the Works?
There is growth out there, but it remains modest. Companies continue to push the envelope in terms of worker productivity and cost containment. But while corporate balance sheets remain in excellent condition (especially among large-caps), the numbers aren’t yet good enough to be a catalyst for bidding.
This is why I feel it’s important to focus less on what the market is doing at this time and more on individual holdings and investment risk. As you likely well know, share prices have already gone up.
It could very well be that 2015 is a flat or even down year for stocks. The equity market has certainly earned it after so many years of upside.
One of the things that speculative investors may wish to consider this year is value in the oil patch. I think the rut in the energy sector will take a lot longer to play out, but the dramatic drop in oil prices has created an opportunity—and this is especially the case with smaller-cap producers.
Oil: Best Value for Investors in Slow 2015?
All resource-related investing is inherently high-risk; there is so much beyond your control as an investor/speculator in industries driven by commodity prices.
In the specific case of oil, at this time, I’m actually keeping my eye on pipelines, because many of these businesses sign long-term contracts for the transportation and storage of hydrocarbons. They don’t sell on spot prices, which lowers risk.
An example of the kind of company income-seeking investors may want to watch in this sector is Kinder Morgan Inc. (KMI). This newly consolidated enterprise has tremendous assets in oil and gas transportation and storage. The business boasts excellent prospects for the next several years for dividend increases. Plus, the shedding of non-core assets should provide a boost to earnings going forward.
Smaller-cap oil and gas producers may be where there’s value now, though. (Until recently, it certainly wasn’t there.)
One company we’ve looked at previously in these pages and is worth keeping an eye on is Northern Oil and Gas Inc. (NOG), which is now trading for a third of what it was last September.
Investors may want to watch a stock like Synergy Resources Corp. (SYRG) as well. This junior oil play has proven to be a great trade when it’s down and is a decent example of a top takeover candidate at this time. Synergy Resources has weathered the downturn in oil prices incredibly well.
With this in mind, the majority of oil stocks trade like gold stocks—they aren’t going to go up on the stock market unless the underlying commodity is doing so commensurately.
And this is the great inherent risk with resource stocks. Not only do you have to bet on the right company, its management, its properties, growth prospects, and institutional awareness, but you also have to bet that the underlying commodity will be accommodative.
The rut in oil is helpful for a lot of industries and consumers. For oil stock speculators, there is now solid value in the oil patch.
But for oil to reverse its current trend, it needs a major catalyst—and right now, that seems elusive. Now is a great time to be looking at this downtrodden sector, but investors shouldn’t expect much in the very near-term. The glut will probably take all year to play itself out.