3 Oil Stocks to Make Volatility Your Friend

by Richard Band | May 9, 2012 8:54 am

Let’s step back for a little lesson in investment wisdom.   I suspect we could all use a refresher, with the markets—notably stocks and gold—whipping around in recent sessions like a flag in a tornado.  On Tuesday the Dow swung 312 points from the opening bell to the day’s low to the close, while the price of gold for June delivery traveled $46.90 an ounce (mostly down) during Comex business hours.

Volatility frightens investors, particularly when prices are falling.  However, it’s important to remember that fluctuating prices—even sharply fluctuating prices—are, and have always been, a feature of the investment landscape.

Take stocks, for example.  Over many decades, it has been perfectly normal for blue chip stocks to ride up (or down) 15%-25% within the space of a year.  Small caps and other issues of a more speculative bent typically fluctuate 30% or more in a 12-month period.

You should expect these roller-coaster lurches if you plan to invest in individual stocks.  But what should you do about them?

First, keep your eyes primarily on the big picture—the forest, not the trees.  It’s easy to become obsessed with the stocks in your portfolio that, at any given time, aren’t performing as well as you might like.  Stay focused on the overall progress of your portfolio.  If your holdings are properly balanced (between stocks and fixed income) and diversified (among individual securities), you’ll have plenty of good news to celebrate.

Of course, I’m not advising you to ignore the individual pieces of your portfolio.  When you do take your analysis down to the micro level, though, you should always ask yourself:  “What kind of return is this investment likely to deliver from now on?”

If some event has occurred that will impair your profits for years to come, you should sell as expeditiously as possible.  On the other hand, market declines are often merely temporary.  In such cases, a person who funnels new money into the investment can expect a higher return than before.

The lower you buy, the richer your prospective gains.  That’s how to make volatility your friend!

Nobody has a magic formula to determine whether a price setback is only fleeting.  To me, though, the weight of the evidence strongly suggests that the recent downturn in oil, gold and other natural resources (the raw materials as well as the stocks) will pass before long.

Yes, there’s a risk — and not a trivial one — that a bout of economic weakness, spreading from Europe across the Atlantic, could drive these assets lower in the next few months, just as happened during the summers of 2010 and 2011.

However, we know that central banks around the world are frantically creating money in an effort to stave off a 2008-style deflationary relapse.  In the end, I think they will “succeed” (if that’s the right word).  For oil in particular, surging global demand will take care of the rest.

I added to my personal stake today in model portfolio picks Occidental Petroleum (NYSE:OXY[1])and Total (NYSE:TOT[2]).  Of the two names, OXY probably offers greater appreciation potential—in the neighborhood of 30%-40% in the coming year, versus 20%-30% for TOT.

However, TOT, with its fat 6.5% dividend, boasts the more stable share price.  So I own both.

I also padded my holdings of BP (NYSE:BP[3]), one of our Niche Investments.  Current yield: 4.7%.   As BP resolves its Macondo liabilities, I look for the stock to climb 50%-70% over the next three or four years.  No UK withholding tax on dividends.

P.S.  Upbeat earnings report today from Invesco Mortgage Capital (NYSE:IVR[4]).  Q1 profits of 72 cents per share easily covered the 65 cent dividend, and book value jumped 12%.  Aggressive investors can buy IVR on a dip.  Current yield for this Cash Gusher: 14.3%.

  1. OXY: http://studio-5.financialcontent.com/investplace/quote?Symbol=OXY
  2. TOT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TOT
  3. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  4. IVR: http://studio-5.financialcontent.com/investplace/quote?Symbol=IVR

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