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One Sector ETF that COULD Be A Ripper!

FYI | Dec 10 2014

By Peter Switzer, Switzer Super Report

This might not suit your investing style. This might seem like gambling, and I guess it is, but what I am about to write will either excite you or provoke you to say “no way I am doing that”. If the latter is you, I think you need to know exactly why you think this and be comfortable if the sector I am talking about does rebound big time and you miss out.

I think it all gets down to time.

The power of energy

I have to confess, before talking to Sam Stovall of S&P Capital IQ’s Market Intelligence group in the shadows of Wall Street last Tuesday I was wondering if the rout for the energy sector was a tad overdone?

Then Sam at the end of my interview actually said he had written a report, which was entitled “Got Time? Buy Energy.”

Don’t get me wrong — this is a gamble — but so was buying Macquarie under $20 when the GFC was threatening the company. So was CBA under $30 around the same time. Macquarie was like a 10 to 1 shot at the races while CBA looked like a favourite at two to one, but favourites do get beaten.

I think some US investors would have thought Lehman Brothers usually ran as a favourite!

But I digress and probably am making you think about yourself as an investor.

This is what Sam told his followers in his regular newsletter:

“It is probably fair to say that investors in the energy patch did not have a good Thanksgiving. During that holiday shortened trading week, the energy sectors around the globe declined from 9% to 19%, while their corresponding benchmarks either gained in price or posted minor declines.

“The rolling 12-month relative strength (RS) for the S&P 500 Energy Index was recently around 81, meaning that this sector’s 12-month price change was nearly 20% below that for the S&P 500.

“There have been six times in the past quarter century that the S&P 500 Energy Index traded this low or lower. Over the subsequent 24-months, however, the S&P 500 Energy Index was positive six of six times and beat the S&P 500 five of six times. It also outpaced the broad market by an average of 16 percentage points.

“And if you think the large-cap energy sector looks attractive, the S&P SmallCap 600 Energy Index’s RS appears downright compelling. Since 1995, whenever the S&P SmallCap 600 Energy Sector recorded a 12-month relative strength that was at or below last Friday’s reading, the SmallCap Energy sector outpaced the small-cap benchmark by an average of 24 percentage points in the following year, and by 81 points in the subsequent two years.

“Of course there is no guarantee that what worked in the past will succeed in the future, but in my opinion, these low RS levels make Black Friday bargains pale by comparison.”

This time is different?

That’s Sam’s historical take on energy and how you COULD play it but my view is that most investors would be worried that the future for energy companies has changed forever. The US’s supply of shale oil, which makes it the second biggest oil producer in the world, is a huge issue that could hold prices down for a long time. Alternative energy sources — uranium, solar, wind — could also frustrate Sam’s historical perspectives.

While others — smarties — could be saying this sell-off is overdone and is linked to the weakness in Europe and to some extent China. But in two years time there could be more global economic growth and that will raise the price of oil. Also OPEC could be playing hardball to chase out the high-cost oil producers, just as BHP and Rio are doing as the iron ore price slide.

These smarties will be trying to guess the bottom. They might get it wrong in the short-term but pull off a coup in the longer run. Smarties usually try for a short-term, quick profit but longer-term investors do have time.

For example, I pondered whether I pulled the right rein with Wesfarmers a few years back with all of its debt and the GFC worries hitting debt-laden businesses. But I like the CEO Goyder and I knew if he got Coles right, like he did with Bunnings, then it was a good bet, sorry, investment.

Take your time

Jim Paulsen, who is the chief investment strategist at Wells Capital Management here in the US, warns picking the bottom for oil won’t be easy. He recommends buying in stages on big down days and he agrees with me that the global economy’s improvement will be the source of future profits if you become an energy punter.

And if Draghi gets some big QE wins then energy could be the laggard beneficiary.

I would warn about moving too quickly as there can be tax-loss selling around now but maybe in January — a good month for stocks — it could be the time to start sneaking in. Note I use the words “sneaking in”!

It’s worthwhile pointing out that Goldman Sachs is neutral on the sector right now and given that the experts were telling me that Woodside was a good dividend play at $44, is it still good at $36? Mathematically the answer is yes but revenues would be falling for the company with the price slide.

By the way, as we’re all being encouraged to think about our exposure to foreign assets and markets, especially as the dollar looks set to see the 70s over 2015, possibly playing an energy ETF might provide a bit of diversification outside of your core holdings.

Remember this is only worth thinking about if you are prepared to wait possibly two years for the big payoff. What payoff? Well, go back and reread what history tells us and then think LONG and hard about it.
 

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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