From MSN>>>>>Drilling into the data for a contrarian energy play
Careful investors can use the Investor fund finder to strike up some ideas in this high-stakes, volatile industry. Here's how I'll take my own advice.
By Mary Rowland
I've just returned from the Renaissance Weekend on Hilton Head Island, S.C., an invitation-only gathering of about a thousand influential people from all walks of life, including President and Mrs. Clinton.
The weekend is crammed with some 300-plus panels on everything from the needs of a thirsty soul to more mundane pocketbook issues, all of them confidential and off the record.
So I can't tell you what anyone said. But I think it's fair to tell you what I recommended in the panels in which I participated and to say that people much smarter than I am agreed with me -- well, they didn't agree with me so much as beat me to the punch, actually. In fact, they were so convincing that I decided to take my own advice and start the new year off with an investment in oil services.
A few nuggets about oil and gas
But I'm getting ahead of myself. On New Year's Eve at 6 p.m., I was a participant on a panel that was to provide stock tips for the new year. I figured it would be a small group, what with everyone getting ready for the New Year's party. But it turned out to be standing room only.
I planned to give my "buy and hold" spiel followed by a plug for indexing, but knowing, of course, that I'd be expected to cough up some names, too.
Years ago, I wrote a regular column for a publication called "Petroleum Digest," and I picked up a few nuggets of information about the oil and gas business. I knew that oil prices are bouncing around a low and that 1998 had been a bad year for oil services -- off more than 60%.
If this isn't the bottom, it's close. Services are a leveraged way to play a turnaround in oil because a bump up in oil will give a lot more juice to a services company than to a huge company like Exxon (XON). I planned to recommend oil services as a contrarian play.
But before my turn came, two other panelists (a money manager and a venture capitalist) called the industry their favorite for 1999. As I said, they were so convincing that when I got back to my office, I decided to do a little research in the Investor section of MoneyCentral.
Would size really matter?
That's when things got dicey, though. This is a high-stakes, volatile industry whose business depends on the number of rigs in operation. Service companies supply pipe and ships, do drilling and lease rigs. Despite the bit of knowledge I'd gleaned from my column years ago, I didn't feel I knew enough about the industry.
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So I asked for the companies ranked by market cap, thinking that size would really matter here. I didn't want a company just barely hanging on, because I don't know when the turnaround will come.
My list was headed by Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI), Weatherford International (WFT) and BJ Services (BJS) -- companies I knew. I also like companies with a clean balance sheet and little debt. But when I asked for debt-to-equity ratios, they looked like this: 43, 32, 58, 42 and 27. (Investor subscribers can see the full search results by clicking to the left.)
I did spot two companies that had been mentioned over the weekend: Veritas DGC (VTS) and Patterson Energy (PTEN). But all I really had on them was a stock tip. A careful investor never makes a move based solely on a stock tip.
So I decided this was a place where a mutual fund manager could add value. I needed someone to do the stock picking for me. I turned to the fund finder and looked for specialty funds, finding the energy funds mixed in with natural resources.
5 funds worth considering
I knew I wanted a focus on oil services and equipment and that funds with low expenses generally perform better. In most cases, I like a fund with an expense ratio of 1% or less. But setting expenses too low might eliminate most of the funds in a small specialty sector like this. So I ran a screen for funds with expenses lower than 1.5%.
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Vanguard Energy
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That turned up five funds that are worth considering as a contrarian play: Fidelity Select Energy Services (FSESX), Invesco Energy (FSTEX), Vanguard Energy (VGENX), Fidelity Select Energy (FSENX) and the American Gas Index (GASFX).
My favorite fund among that group is the Vanguard fund. It's a no-load fund with a 14-year veteran manager, Ernst von Metzsch, and a tax-efficient 19% turnover ratio. With its dirt-cheap expense ratio of 38 basis points and its broad exposure across the entire energy industry, this would be an ideal contrarian play for the careful investor.
I specifically want energy services rather than broad energy exposure, and Fidelity Select Energy Services is the only one to offer that. There are a couple of red flags to consider with this fund, the main one being that it changed managers in October. That can be good for a fund that hasn't performed well, but it's still a wild card. The fund also has a 3% sales load and a relatively high 78% portfolio turnover, which has held the tax-adjusted rate of return to less than 6% over the past three years.
Targeting a sub-sector like that increases my risk, but this time I'm willing to ratchet up the risk a bit because it also increases my potential return. If I'm right on the possibility for a turnaround in energy services, I'll get more bang for my buck in the Fidelity fund. And that's what I want this time.
So in for a dime, in for a dollar. I decide to start the new year by putting $5,000 into Fidelity Select Energy Services with a two-year time frame for a turnaround.
A few suggested strategies
As for my other tips, I did recommend a buy-and-hold strategy and a core of index funds. Those shouldn't be tampered with. But for new money to be invested this year, I suggested a few strategies.
One is investing in out-of-favor sectors. In addition to oil services, I mentioned Japan. The best way to buy Japan is with Japan World Equity Benchmark Shares (WEBS). (I own these. See "Put a little growth in your portfolio." To learn more about unit investment trusts, see "A mutual fund alternative: unit investment trusts.")
The second strategy is to buy big U.S. companies with a solid market niche that are currently out of favor with Wall Street analysts. Motorola (MOT) and Boeing (BA) fall into this category. (Disclosure: I own shares of Boeing.)
The third is to get a toehold in the growth area of the economy, which is technology. Stocks here are not cheap. But for those who don't own any yet, I suggested dollar-cost averaging into these four: Microsoft (MSFT), Intel (INTC), Cisco Systems (CSCO) and Nokia (NOK.A). (Microsoft is the publisher of Investor.) |
