3 Oil Stocks To Watch After the Fall

by Richard Band | April 11, 2012 10:00 am

What can we say, other than:  It’s about time!  After defying gravity for weeks, and ignoring numerous warning signs I’ve pointed out on this page, stocks have gotten rapped on the knuckles over the past few sessions.  The Dow plunged 214 points on Tuesday, wiping out all its gains dating back to February 3.

There’s a lesson in that, too.  As a little gem of Wall Street wisdom puts it, “Stocks take the stairs up, but the elevator down.”  The market chewed through 41 sessions to win the ground it has just given back over the past five.  Far better to sell a few days—even a few weeks—early, than a few days too late.

But we’re not doing any selling now.  That would be slamming the barn door shut after the horse had already bolted.

As of this afternoon’s close, stocks are deeply oversold on a short-term basis.  Trading volume in declining NYSE stocks has swamped that in advancers by a 2:1 margin over the past 10 days.

Yes, it’s possible for the ratio to go to even greater extremes.  (We saw 3:1 during the panic last August.)   Chances are, though, we’re close to a tradable bottom.  I look for the market to bounce back to the area of its April 2 highs by late this month.

Still, I advise you to buy judiciously and selectively at this point.  While a few market sectors offer excellent value at current levels, many others are still overpriced.  It will probably take another summer thunderstorm (similar to those of 2010 and 2011) to wash out the excess and give us a strong market-wide buy signal.

What should you be accumulating now?  Oils.  Oils.  Oils.  Did I make myself clear?  Oils.

The emerging economies of the world are devouring more and more oil each year. More automobiles are now sold in China than in the United States.  Hundreds of millions of people in China, India and Brazil are never going to ride bicycles to work again.

In other words, while there may be violent short-term swings in the price of crude, the long-term trend, in “real” (inflation-adjusted) dollars, points in only one direction: up.  Well-managed oil producers that keep a handle on their operating costs will continue to reap enormous profits.

I’ve been loading up on Royal Dutch Shell (NYSE:RDS.B[1]) in recent days.  Starting with the June payment, Shell will increase its dividend to 86 cents per share quarterly.  That works out to a yield of just over 5% at today’s closing price.

In this risky, scary world, it’s almost impossible to nail down a 5% yield on a business as safe (pretty much inflation-proof and recession-proof) as Shell.  I plan to make RDS.B one of my “monster” stock positions, eventually rivaling McDonald’s (NYSE:MCD[2]) in size.

I’m also building a large stake in France’s Total (NYSE:TOT[3]).  News from the company’s Elgin platform in the North Sea is mildly encouraging; the gas flare has gone out, substantially reducing the risk of an explosion.  Current yield: 6.2%.

By the way, I understand that if you own TOT in a (taxable) individual or joint account, the French government imposes only a 15% withholding tax on your dividends.  Unfortunately, I own the stock in a trust account, so—for some reason known only to lawyers—I have to pay 25% tax.  In the end, though, I expect that the capital gains I earn from TOT will dwarf any dividend slippage from the withholding tax.

Besides Royal Dutch and Total, I’m bulking up on Occidental Petroleum (NYSE:OXY[4]), too—the third oil stock in our model portfolio.  OXY features a more modest dividend yield (only 2.4% at last glance).

However, this outfit is one of the world’s most efficient finders and producers of crude, with an astounding 27.7% net profit margin (after taxes) in 2011.  If it’s long-term growth you’re after, very few large-cap oils are likely to match OXY.

From here, I think the stock can generate a total return (dividends plus capital appreciation) of 30% in the next 12 months, and a double over the next three to four years.

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