I shorted oil last week, and won. Yes, I know it sounds crazy seeing how hot prices have been. That’s because I’ve been patient sitting on my thesis and I used a headline spike moment. The experts are now calling for $150 per barrel price on oil. That was the trigger that made me pounce. I believe this is a temporary situation in oil stocks from rhetoric, not sustainable facts.
Today I will share the three oil stocks to avoid, but do your own homework. My point is to help dissuade investors from chasing blindly. I don’t condone shorting stocks outright post the GameStop (NYSE:GME) super-spike events.
I have many issues with the whole concept of this demand crisis. We should not call it a crisis when it is by design. The U.S. can pump enough oil to satisfy our demands. I already pay more than $5 per gallon in Southern California. I’m pretty sure when that becomes the price in Middle America the White House will change its tune. I don’t think they want the nation to suffer from the cash crimp from runaway gas prices. They would act to suppress them. Over the weekend, the EU started that conversation already. Can they do that? Sure, the whole world accepts that it’s a rigged market.
The U.S. has a significant horde of reserves that they can release under political pressure. The Federal Reserve is panic mode combating inflation. Just imagine what exorbitant energy prices will do to that. Out-of-control oil prices cause system-wide damage. The stock market will also suffer because the Fed will need to be more aggressive. In that scenario, these three oil stocks to avoid will also fall — even if the commodity itself rises.
Experts Outbid Each Other for the High Mark
Financial market gurus are trying to out do each other with oil prices headlines. The calls span from $105 to $150 per barrel. We’ve seen this movie before. I remember in 2013 when Goldman Sachs also called for $150 prices. It topped out shortly after and crashed 75%. If you count the pandemic debacle the United States Oil Fund (NYSEARCA:USO) actually went to -$35 wink-wink.
Last Thursday, I had my fill of wind bags and I shorted the USO using options. The position carried finite risk and delivered a 50% return in mere hours. I did it live in my trading room and others participated and won too. The three oil stocks to avoid do not move perfectly with the per barrel price of the commodity. That is my way so I don’t fight the rhetoric. I am bearish, but not stupid.
By definition, oil prices are a fantasy game. There is a cartel we call OPEC whose members strategize to manipulate prices and supply. I don’t play with cheaters, so I will use equities of oil companies instead. Trading fundamentals and charts is an easier game. Oil prices have influence but not a 1-to-1 relationship. When I say “short” I most definitely do not mean the traditional way. Selling stock that I don’t own leaves me open to non-quantifiable risk.
My first rule of taking risks is knowing the maximum damage potential. If I borrow shares and sell them, I would be leaving myself blind to the maximum pain. Instead, I use options where I can deploy strategies with finite risks. Some don’t even need a price drop to win. Regardless, I would use stop losses in place for even more safety.
Let’s get to the three oil stocks to avoid today:
Oil Stocks to Avoid: Chevron (CVX)
This is the toughest one of the three setting all-time high records. CVX stock is showing no weaknesses and no signs of fading. I find this to be illogical under the global green commitment. The whole world has already decided that they want to use less oil from now on.
The engagement in this is so high that all car manufacturers also have set the same goal. From that alone, this means that energy consumption will lose 100 million client vehicles per year forever. The process will take a while to happen but it’s happening.
I find it mind-boggling that CVX stock that deals with this stuff is breaking records. Moreover it’s when equities on Wall Street are in a correction phase. Shorting CVX outright carries too much risk. Options offer safer alternatives, but my call today is to avoid a potential pitfall by not chasing this late. When the pandemic was ongoing, I shared bullish ideas about it and it’s competitors. But the stock price was half of what it is now. There was value plain for all to see, and now it’s the exact opposite. The yield was double that it is now.
The least investors can do is not fall for the experts’ tricks. Resist chasing CVX even though it is the chief of the oil stocks to avoid now. Even as the rhetoric for runaway energy prices heats up, I must resist. They were wrong the last time, so buyer beware. I have nothing against the company, it’s a financial monster and I would recommend later.
Exxon Mobil (XOM)
XOM is fundamentally almost identical to CVX. Therefore I won’t regurgitate the same valuation issue I have with it. It pays 5% in dividends, and that is certainly attractive. When I suggested buying the shares last, it was closer to 10%. In addition, the stock was in a deep chasm, so it lacked the correction threat.
Now, and from these high altitudes, XOM’s dividend reward won’t do much offsetting correction losses. The market cap shrinkage if the stock falls fast would eat that yield and ask for seconds. The good thing about Exxon stock is that management has its complete commitment to maintaining the dividend. AT&T (NYSE:T) investors were not so lucky, as their divvy there was not sacrosanct.
But for that purpose there are better options now. Like the 3M Company (NYSE:MMM) now also pays 5% and has a similar price tag as CVX. Its fundamentals are also solid and it can be defensive during times of stress. I found it while doing homework this weekend, so I thought I’d share it with you. Moreover, it has fallen near a prior bounce level so there is support below. I am certain you can find other ones.
Oil Stocks to Avoid: Energy Select Sector SPDR Fund (XLE)
The XLE stock inherits about 44% of its value from our two previous stocks today. XOM and CVX are about half of it, therefore everything I said about them applies here indirectly. Since the exchange-traded fund has many other stocks, it has a diffused risk profile across the industry. This offers the XLE a somewhat diversified risk of single stock headlines.
In the past I have preferred investing direction into energy stocks. I did it almost exclusively with our two giants today than the XLE. But today I am calling even to avoid chasing it too. There is no rush piling into a runaway meme this late in the game. My nightmare scenario is to be the last person into a stock. I would rather risk missing out than hold a losing bag for months. Those who chased oil stock headlines late nine years ago are still waiting for their bailout. I don’t think it should be us who swap places with them.
Since the XLE doesn’t have its own financial metrics, I will address the technicals. Charts are agnostic to opinions, so they don’t lie and they don’t carry bias. The breakout may have started from $75 per share. The target of that could be as high as $112 per share. The drop below zero has caused some distortion in the chart. As a result, the technicals can be a bit fuzzy. The fact that the value went to negative should raise concerns about the whole sector.
Oil investors must know and accept that there is heavy cheating happening. Unless you think your skills are outstanding, your odds are that winning won’t come easy.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.