From The Wall Street Journal, December 29, 2014
For some investors, energy stocks are the best bargain of this holiday season.
In the weeks leading up to Christmas, money managers scooped up energy companies. They were attracted by the sector’s steep fall in the second half of the year as the price of crude tumbled.
Energy stocks in the S&P 500 are down 19% in the last six months, but in recent weeks the group is seeing a resurgence of sorts, thanks to investors fearful of missing a good sale.
“We’re eager to accumulate a sizeable position in energy over time, and we’ve started that process with a couple of small buys,” said Keith Goddard, chief investment officer at Capital Advisors, an independent investment manager that oversees $1.5 billion in Tulsa, Okla.
He knows full well why other money managers may view him as a bit overeager. If crude oil futures continue to fall, the slide in energy stocks could get worse before it gets better.
But he and other bargain hunters are willing to take that chance.
“There are stocks you can buy right now where you’ll do fine for the next three-to-five years, but the guessing game is whether you’ll be able to get them at even better prices,” he said.
Capital Advisors currently holds Denbury Resources, and it has started to buy up shares in companies such as Range Resources. Prior to October, the firm’s energy exposure was primarily through midstream companies like Williams Companies Inc. and Kinder Morgan Inc., Mr. Goddard said.
The vast pool of beaten-up energy stocks is enticing to other money managers, too.
After watching energy stocks tumble more than 16% from early October through mid-December, compared to the S&P 500 index’s nearly 3% gain, Michael Fein, president of wealth management firm CIC Wealth, knew he had to do something.
The Gaithersburg, Md.-based firm, which manages nearly $500 million in client assets, decided to hold an investment committee meeting to discuss diving into a couple hard-hit energy names. The firm owned no energy companies for clients, but it’s considering putting some client money into companies that aren’t specifically involved in exploration and production, a subset of energy companies closely tied to commodity price fluctuations, but those that are related to the sector and also have seen share price declines.
Among the prospective companies Mr. Fein wants to put money into are Schlumberger, down 15% in the past three months, and Trinity Industries, a railcar manufacturer that’s down 41% in the same period.
What these managers are betting on is that during the December stock swoon traders took their eyes off of corporate fundamentals and opened the door for some relative steals in energy names.
Paul Atkinson, who helps oversee $3 billion as head of North American equities for Aberdeen Asset Management, said he has been buying shares of some energy companies that he believes are well managed and can withstand a period of lower oil prices. “The net impact of low oil prices is better [for the economy], and the energy and materials companies have become too cheap for what they can deliver.”
It’s not all rosy, though–some money managers say that sharp declines in energy-related stocks can make for less-than-pleasant conversations with clients.
“We’ve seen our clients’ holdings get hit pretty hard ,” says Thomas Mingone, managing partner of Capital Management Group of New York, a wealth management firm.
For instance, Mr. Mingone says many of his clients have money in master limited partnerships, publicly traded entities that don’t pay corporate income taxes and pass the majority of their income to shareholders. Most MLPs earn money by charging oil-and-gas producers to transport or store their products and have relatively little direct commodity price exposure; however the sector has taken a hit as the price of oil has tumbled.
When it comes to other energy companies, though, he’s remaining on the sideline, at least for now. He said he wants to wait until the price of oil stabilizes before he even considers picking up some downtrodden energy names with his clients.
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