Buy of the Decade in Oil

This time, it’s different.

When some clown in the stock market says, “This time, it’s different,” it is usually a top in the market. You might remember investing in the late 1990s. The “this time its different” call was ubiquitous.

Stocks were valued at price-to-eyeballs, meaning how many people visited your website. Revenues, much less earnings, meant nothing. Much like today, price-to-earnings ratios were hollow.

The upshot was that after creating the bubble, the Fed tightened too late. Money dried up, the tide went out, and many companies were swimming naked — to brutalize a saying of Warren Buffett’s.

But today, dear readers, we are not here to talk about the tops of markets; we are here to talk about the rebounds.

The Flying V

At the start of 2016, we saw the S&P 500 drop 10% and then bounce back 10% to hit new highs. After a tremendous amount of research, I’ve discovered two other situations where this same scenario happened. I’ve also determined which sector will go up the most…

First, a little background.

1. Example 2003

Two years after the dot-com crash, the market was very worried about missing the next correction. No one wanted to be holding AOL or Yahoo! at the top yet again.

S&P 500 2003 Chart:

As you can tell in the chart above, the S&P 500 started down for the year, falling from 940 to 800 by mid-March.

No one wanted the tech names, which in turn meant they were very cheap and the survivors were growing rapidly.

The same sector that lead them into the crash reversed and lead them out.

Here is Red Hat (NYSE: RHT), which was a Linux company at the time. You’d take a 400% gain in a year, and you’d like it.

Red Hat 2003 Chart:

2. Example 2009

Our second example of the stock market crashing at the start of the year and reversing in March happened in 2009.

You may remember that fateful year. There were liar loans and liquidly issues. Big banks and brokers went fish-white, belly-up. It was bad.

You may remember that the Federal Reserve was also hiking rates at the time from in the twos to above 5%. This killed the second Fed-created bubble in a decade. From the start of 2009, the S&P 500 fell from 950 to 666 in March.

S&P 500 2009 Chart:

The S&P 500 then reversed and ramped up. March 2009 turned out to be the biggest buy opportunity of our generation.

And again, the sector that led into the crash — financials — also led out.

Bank of America (NYSE: BAC) 2009 Chart:

This stock went from $2.50 to $18.30 — a 632% gain in a year.

3. Example 2016

Here we are in 2016. The Fed has raised rates. Though not very high in nominal terms, it is still a 100% increase from 0.25% to 0.50%.

The stock market was led lower at the start of the year by oil prices falling.

S&P 500 2016 Chart:

2016 WTI Oil Price Chart:

As we have seen from former March reversals, it will be the oil sector that leads us out of this correction. The oil sector ETN (NYSE: OIL) is already one of the best-performing sectors. From the March lows, it is up some 16%. Lucas Energy (NYSE: LEI) is up 135% today alone.

Value Screen

My proprietary Crisis and Opportunity value screen, which has a 600% historic five-year return, is now loaded with oil companies.

First, let my qualify these stocks by saying this is preliminary research — that a screen is a starting point. It gives you a few companies to further investigate.

That said, the top oil sector companies by market capitalization are Hess Corporation (NYSE: HES), National Oilwell Varco (NYSE: NOV), Diamond Offshore Drilling (NYSE: DO), Atwood Oceanics (NYSE: ATW), and Newpark Resources (NYSE: NR).

All are trading less than 75% of book, have debt/equity less than 90% of industry, and have a price-to-cash flow less than 15.

That is all,

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.