Even though the last couple of years have been largely dominated by an economic crisis, it is clear that the demand for energy is still increasing. In fact, it seems the world’s hunger for energy is almost insatiable. The implication, when it comes to investments, is that investing in oil still warrants serious consideration. But how can the average investor gamble on rising oil prices?

Oil ETFs

Exchange traded funds attempting to track the price of oil abounds. To invest in them, you simply buy shares, as you would with a company. Shares in Oil ETFs are traded on most, if not all, major stock exchanges.

Oil ETFs attempt to accurately mirror the price of oil through various instruments, mainly by trading in futures contracts and by investing in oil companies. The value of companies producing oil is closely correlated with the oil price, it is not a perfect correlation by any means, but there is a tendency of the value of oil stocks to rise, when the oil price does. In fact, for some companies, the value of the stocks tend to rise proportionally more than the oil price.

Oil Stocks

Smaller oil producing companies tend to see their value increase more than the proportional increase in the oil price. On the flip side, they also tend to see a larger fall in value when the oil price goes down. For the investor willing to tolerate significant risk, this presents the intriguing option of investing in oil companies. If the value of oil does indeed increase, a diversified portfolio of oil company stocks, should more than mirror that increase.

An easy way to invest in a diversified portfolio of oil companies is to invest in an oil mutual fund. Compared to piecing together a diversified portfolio yourself, this will save time and commissions. Compared to investing in just one oil stocks, this will drastically reduce risk.

Mutual Funds, Oil Companies, and Oil ETFs

There are a lot of options for investors looking to gain exposure to the price of oil. Which option you choose, should depend on why you want to invest in oil and how much risk you can live with.

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His strategy stems from the philosophy that being knowledgeable and intelligent about the companies you choose to invest in is more sensible than picking multiple stocks to throw money at in the hopes this will cover any lack of knowledge about the investment.

These days, the Fairholme fund outperforms much of the competition, yielding positive returns even in this struggling economy.  The fund Bruce Berkowitz founded in 1999 looks for opportunities in the morass of failing businesses where the beginnings of future star performers can be made.  The Fairholme fund has proven that this strategy is effective, delivering comfortable returns  every year that consistently beat the S&P 500.

When the Fairholme fund managers seek out a new investment opportunity, high on the list of priorities are business with heavy cash flow, and a promising line of services or products that won’t soon become obsolete.
Among the current lineup of twenty two stocks, the latest additions to the Fairholme fund include a stake in the health care industry with investments in United Health Group, Pfizer, and Forest Laboratories.

According to bruce berkowitz, health care is ripe to become a top performing industry.  Indicators of this are the projected needs of Baby Boomers as they continue to age, which also makes drug companies like Pfizer an excellent choice for providing the needed medications of future generations.  Drug companies that are well entrenched in the health care industry at present stand to gain significantly in the coming years.

If the success of Warren Buffet is any signal as to how the strategy of the Fairholme fund will perform in the coming years, we can expect Bruce Berkowitz to become one of the most talked about fund managers in the near future.

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Going green doesn’t mean preventing profits. It can be considered as revolutionary ideas or creations that will improve your life, or that of someone else, which won’t hurt the environment. One such example is the electric car. There are many new companies that have new patents which have been engineered for it. While the technology is not new, it is becoming more accessible for the general population. This provides a great possibility for a large market share and high stock price.

Another example of green profitability is solar energy. It was very expensive in the past if you wanted to incorporate that in your home. Now solar energy is used not only in the home, but by business and industry as well. You can keep abreast of new technology by watching the latest news, or a blog about green investments. You can monitor the various companies just as you would any other. You can then make your decisions about where to place your money.

The right IPO can provide you with enough profit to make a dent in your retirement, or college fund. You should start taking advantage of these new green inventions and their IPOs . You will find that it is possible to make money with green companies, and you won’t have to worry about sleeping at night wondering about the best intentions of the companies after you’ve purchased shares of their stock.

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Perhaps the easiest way to trade natural gas is to invest in a natural gas etf. ETF stands for Exchange Traded Fund. These investment vehicles are similar to mutual funds. Both are typically made up of a basket of related stocks.

There are several natural gas ETFs to choose from. But which one suits your investing style?

There are many ways to trade natural gas. There is SPDR S&P Oil & Gas Equipment & Services ETF, stock symbol XES. This Gas ETF tracks an index of oil and gas equipment and services companies. What this fund tries to do is to replicate (as close as possible) before fund expenses the total return performance of the S&P Oil & Gas Equipment & Services Select Industry^®Index. The goal of this fund is to have low portfolio turnover and lower costs. Some of the companies in this fund are Schlumberger, Haliburton and Diamond Offshore Drilling. These companies may not be in the index when you purchase this ETF. Check the website for its current holdings.

The SPDR S&P Oil & Gas Exploration & Production ETF (symbol XOP) and the Dow Jones US Oil and Gas Exploration & Production ETFs (symbol IEO) invest primarily in natural gas exploration. These ETFs purchase baskets of stocks that are involved in the exploration and production of natural gas. Some of the stocks in these funds have been Exxon-Mobile, Chevron and Conocophillips. Once again, check the fund websites to see the current holdings.

If you want to trade in a fund that attempts to reflect the daily price change of natural gas futures, then the United States Natural Gas fund (ticker symbol UNG) and the United States 12 Month Natural Gas Fund (ticker symbol UNL) may be for you. Both invest primarily in natural gas futures contracts traded on the New York Mercantile Exchange. These are un-leveraged funds, meaning they do not purchase futures contract on margin. By doing so, these funds can never have a margin call. The difference between these 2 funds is that the UNG fund must roll over the entire funds spot month futures contract each month. The UNL is a 12-month fund, meaning it has purchase natural gas futures in each of the firs 12 contract months of trading. Then each month, the fund only need to roll over 1/12 of its portfolio, there by lowering it cost and mitigating the effect of contango or backwardation on the fund.

There you have a brief look at the opportunities to trade the Natural Gas ETF.

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The Canadian Stock Exchange

The biggest Canadian stock exchange is the Toronto stock exchange or TSX.   The hours of this exchange are roughly the same as the NYSE (9:30AM to 4:00PM EST) with some different holidays:

• New Year’s Day – January 1, 2010
• Family Day – February 15, 2010
• Good Friday – April 2, 2010
• Victoria Day – May 24, 2010
• Canada Day – July 1, 2010
• Civic Day – August 2, 2010
• Labour Day – September 6, 2010
• Thanksgiving Day – October 11, 2010
• Christmas Day – December 27, 2010 (in lieu of December 25)
• Boxing Day – December 28, 2010 (in lieu of December 26)

U.S. Holidays*

• Martin Luther King, Jr. Day – January 18, 2010
• Memorial Day – May 31, 2010
• Independence Day – July 5, 2010 (in lieu of July 4)
• Thanksgiving – November 25, 2010

The Canadian economy is strongly based in exports of commodities and they have some famous large banks.  My Canadian stock picks will definitely fall in these two industries.  One Canadian oil stock I particularly like is Canadian Oil Sands Trust.  I believe the US will look to purchasing oil from non Middle East sources.  While drilling in the US is ideal, we’ll look to our local neighbors first, and Canada has no political inflammatory implications with it.  The oil sands have been known about for a long time it just wasn’t worth going after until oil prices shot up over the last few years.

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One oil stock I like is Valero Energy Stock Ticker: VLO

Even at today’s low prices the stock has gained an average of 20% per year for the last 20 years. That is pretty freaking amazing I don’t think most people’s mutual funds have done that well through the boom and bust cycle.  My only real concern is the growth rate.  If it’s not sustainable the stock could sit idle a bit longer especially with its variable positive/negative cash flow and earnings per share.

I think the best oil stock out there right now is Stock Ticker: SII or Smith International Inc.  I particularly like this stock because they make their money in drilling equipment, waste management, and supply chain logistics for the oil drilling industry.  So regardless of oil stock prices this company has the potential of doing well.   If oil prices are high then the oil companies will have more money in invest in drilling equipment, if it’s low then demand will go up and more drilling equipment will be needed.  It’s a win win with their consistent increase in dividend payouts and improved earnings per share.  If you look at the chart SII has consistently bounced back from steep drops, just a nice repeating pattern.

I know these are some crude oil stock picks.  (Ha Ha get it?)  I just wanted to show a stock pick still using my usually CAGR screening, but with some more ties to current affairs.  We’ll see how my current event analysis works out.

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Stock Market Performance Pre WWI (1871-1911): The stock market (S&P) went from 4.44 to 9.27 for a CAGR of only 1.8%

Stock Market Performance WWI to WWII (1912-1944): During this period the stock market only returned 0.7% per year raising to 11.85.  The Great Depression followed by a New Deal government spending it was hard for poor and rich to gain any traction.

Stock Market Performance WWII to Vietnam (1945 – 1965) Here was the first era of serious prosperity with the stock market climbing nearly 10% (9.9%) per year each year.  Imagine the wealth gained by those savers who learned to earn in a time of 1 – 2% returns.  I believe part of it was the beginning of woman moving into the workforce (though most returned after the war until the 1960s and a serious improvement in manufacturing productivity.

Stock Market Performance Vietnam to Desert Storm (1966 – 1991) 5.2% returned a year during this period.  I think it’s interesting to note that this period and after Desert Storm to present are about the same rate of return.  It almost appears the economy is becoming so large, or the face of war has changed so much that the war doesn’t have as much impact on the financial markets.

Stock Market Performance Desert Storm to Present (1992 – 2009) 5.7% returned – again about the same as Vietnam to Desert Storm, though the number would have been a bit better if I would have stopped it at the return to Iraq.

Why did I choose wars as a point to break down eras?  Why not?  You just never know what will pop out at you when you take the time to look at the details and not just muck it all up in one round number.  Why not try the numbers in some way that makes sense to you and tell us all about it?

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Stock Market Info Tips:

1. The Water Cooler Guy – When Fred from accounting tells you about his big score in stock xyz and wants everyone to follow what he’s going to do next in his stock market ventures you better listen, or should you?
   • Pros – The advice is free, if you’re both right you’ll be office heroes and you’ll get quality time with your boss giving his stock tips, and you don’t feel too obligated to follow one way or the other since it’s just Fred.
   • Cons – Office politics may make you feel pressured to follow along, Fred will likely only talk about his stock market wins, not his losses you get a skewed view of his choices.
   • Random Thoughts – If you want to invest in an office setting start a stock market investing club.  That way there is open discussion and time for facts not just boasting, with all the other benefits of the water cooler time.
2. Investment Newsletter/Publications – From the Wall Street Journal to 1000 a month newsletters which ones are worth it?
   • Pros - Investment newsletters can give you insight that is unique and timely, critical to a good investment plan.  Also, you can learn just by following the thought patterns of the authors.
   • Cons – Too cheap of ones everyone gets the same info, too expensive and the stock market info drains too much of your trading account for you to make any money off of the information.
   • Random Thoughts – Don’t spend more than 1% of your trading portfolio on stock market information of any kind.  I know this is limiting in the beginning, but it will stop you from becoming a stock market tool junkie.
3. The Internet – Forums, Blogs, and Search Engines – What else do you need?
   • Pros – Generally the price is right, even the exclusive forums aren’t usually more than $20 a month.  Often they have more expensive newsletters or other services tied to them, but you get to check those out on the sites before you buy. 
   • Cons – There is no good way to validate stock market info on the net since it’s not generally peer reviewed.  So you have to take any ideas with a grain of salt.
   • Random Thoughts – Use the Internet for learning how to think like a investor or trader.   Learn to make a trading plan, or how to calculated risk, but don’t just buy what others are buying, learn how to come to the conclusion on your own.

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Sure we’ve all been pounded chasing a few falling knives before, but as noted in: http://seekingalpha.com/article/111955-dow-chemical-a-legitimate-high-yield-stock

the CEO of DOW stated in October’s earnings release:

Dow is the only company in the Fortune 200 to have paid its regularly quarterly cash dividend without reduction or interruption since 1912…That’s 388 consecutive quarters. I’ve said it before, but I want to say it again, we will not break that streak. [1]

Dow is bound to making it’s dividend payments.  Once it misses a dividend a pile of shares that have been held for decades will get released causing share prices to plummet, and who wants to be the CEO on the watch for that one?

In the chart above I swore DOW had a stock split I had to verify before I wrote this post.  Essentially DOW has only returned 2.9% per year since 1993.  Earnings in 1993 were about $2.02 a share excluding all the speciality business sales and breast implant litigation with a dividend of 21 cents a share per quarter.  The current EPS is $2.75 with a dividend of 42 cents a share per quarter.  So just counting earnings the growth of price and earnings are roughly in line (earnings grew at almost 2% per years) however, the dividend has been growing at 5% a year.  Future earnings outlooks according to Yahoo Finance is 7% per year for the next 5 years.  This kicks out a PEG of about 1. 

DOW is one of those companies I have wanted to own for awhile and it’s likely one I’d hold for awhile.  If you have a portfolio outside of your IRA or 401K I’d recommend it there as it likely will fall into the long term capital gain category with dividend income both of which are tax lowered than ordinary income for most investors.

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Here’s each stock return compared to the DOW Jones returns and S&P 500 returns:

(Click on a stock symbol to see the post where the stock was recommended.)

(Starting price was chosen for end of day on the day the stock was chosen.  This is because the vast majority of you read the site after the market has closed.)

As you can see, if you bought equal dollars in each of the choices you’d be about broke even right now compared to -4% for the S&P 500 returns or -2% for the DOW Jones returns.  Boeing (BA) has been my real dog of a choice (including in real life where they caused my company to have to slow down) and AIG is down compared to the market, though this isn’t unexpected.  I believe Boeing will come back if they ever get their 787 up in the air.

Lowes (LOW) has done very well as well as Ford, though expect Ford to be quite volatile for awhile.  If I was purely trading I’d probably take some profits from the F stock, but that’s hard to do in this blogging nature and I’ll go ahead and hold on to it.  I’m also very happy with how PFE has held up, being the first stock pick, and when either the stock market turns or some of their new products make it through testing I expect very good returns still. 

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