One of the financial assets that has been reactivated in the investment portfolio as of March is oil. To the point that these days the future of this raw material is trading at levels between 30 and 33 dollars a barrel. It cannot be ruled out that from now on, if the price started an upward movement, it could first exceed the barrier that it has at $ 35. So that from that moment on, it can act as resistance. In what can be considered as one of the scenarios that can be raised from now on in this important financial asset.
On the other hand, and as another situation that can originate in crude oil, if, on the contrary, the downward movement that began at the end of this first quarter of the year continues, it cannot be ruled out that in the end the barrel. Being a scenario to operate with crude oil because the investment strategies would be more complex to make the capital available in this raw material widely accepted by investors. Therefore, there is no doubt that his ffuture it will be much more complicated to work on its movements, at least in what refers to the medium and especially short term. There is no room for error, since its potential to rise or rise would be more than appreciable in this scenario that can be considered now.
No less important is the fact that volatility in the price of crude oil is a reality and that we must be very aware of these days. Because in effect, it can go both up and in the opposite direction are extremely easy and therefore there are many euros that are at stake in its operations. With some fluctuations in its price that are far superior to that of other financial assets of special relevance, such as the purchase and sale of shares on the stock market. To the point that the oil market is only reserved for investors who provide greater learning in their operations. And not everyone has this highly prized aptitude in the investment world.
Petroleum, the West Texas Intermediate
These are truly strange times to invest in oil. As if the market gymnastics weren't enough, the price of US crude - or at least the first month's futures contract - was negative in April, and not by a trivial amount. At the bottom, West Texas Intermediate traded below negative $ 37 a barrel. Unfortunately, if you are a retail investor, there are limits to how you can benefit from this. You can't show up at storage sites in Cushing, Oklahoma, and get paid $ 37 a barrel to load your truck with oil, and then quickly dump the barrels to the side of the road as you drive home with your earnings.
If you are an institutional investor or industrial oil trader with legitimate storage and transportation capacity, you can stockpile crude at today's prices, sell it on the futures markets in a few months, and make money. But the rest of us have to get a little more creative in how we invest in oil. Today we are going to look at the dos and don'ts to show you how to invest in oil the right way.
Don't buy oil ETFs
Of course, a good investment strategy is not to buy an oil ETF without knowing what you are buying. In this sense, it must be emphasized that the United States Oil Fund (USO, $ 2,57) could be the worst-conceived investment idea in the history of finance. And we cannot forget that this special investment tool was not as badly built as it seems to be from the beginning.
You cannot buy and hold most commodities, with a few exceptions, such as gold and precious metals. It is generally not practical, so anyone who wants to have a basket of products will do so through the futures market. But a futures contract is very different from a stock.
For starters, a futures contract has a precise expiration date. The USO's mandate was simply to buy the prior month's light sweet crude oil futures contract and perpetually renew it once it expired. So, for example, you would hold May futures until expiration, and then roll over to June futures.
There is a big problem with that. Crude oil has been trading "spot" for most of the last decade. When a market is "spot", long-duration futures contracts are higher than short-duration ones. If that's confusing, think about the oil situation today. Nobody wants oil today because there is painfully little end demand for it. Therefore, the prices are low (or even negative).
But there is demand for oil in the future, so prices are still relatively high if you want it delivered in six months or so.
More expensive contracts
In the case of the USO, the fund has been perpetually rolling over to more expensive contracts, only to sell them as they approach maturity. In other words, in a cash market, USO will be scalded each month, making less money when oil prices rise and losing more when prices fall.
The USO has already had to change its investment mandate several times recently to fix these distortions, each time extending its contract exposure further into the future. Those are steps in the right direction, but it's hard to recommend a fund that keeps changing its investment strategy every few days.
If you insist on playing the oil market with ETFs, consider the 12-month United States Oil Fund (USL, $ 10,35). Spread your portfolio evenly over the next 12 months of futures contracts. It does not entirely escape the issue of cash, but it is not completely sacrificed for it as the USO does. So far this year, USL has lost 55% to an 80% loss in USO.
Market to Saudi Arabia and Russia
The United States will not stop pumping oil entirely and will cede the market to Saudi Arabia and Russia. That's not going to happen. But there will be a jolt, and it is already happening. Whiting Petroleum (WLL) filed for bankruptcy on April 1, while Diamond Offshore did so on April 27. They will not be the last. Most of the worst performing stocks of the last 11 years have been in the energy exploration and production sector. Many oil and gas reserves could face a fate similar to Whiting and Diamond Offshore.
If you want to speculate, of course, go for it. A shot to the moon might be the right move if you're, say, trying to figure out how to invest your stimulus check. Just make sure that you are only risking money that you can afford to lose.
Focus on quality and 'peaks'
They may not be very suggestive at first, but integrated investing strategies are probably your best bet for a long-term recovery in energy prices. These mega-cap energy reserves have the financial strength and access to capital to survive a long energy drought. The real financial difficulties are not in sight in the near future. Still, the stock is trading at multi-decade lows.
Consider the Exxon Mobil (XOM, $ 43.94). Shares are trading today at prices first seen in 2000 and yielding a whopping 8.0%. Depending on how long energy prices remain weak, Exxon may choose to reduce its dividend at some point in the next few years. We cannot rule that out. But if you're buying the stock at prices that were first seen 20 years ago, it's probably a risk worth taking.
One of these companies, Chevron (CVX, $ 89.71) is in slightly better financial shape than Exxon and slightly less likely to reduce it.
Liquidation in the markets
The oil market may look like a dollar store clearance shelf, but that doesn't mean investors should buy barrels as if they were Easter candy out of season. The floor prices have piqued the interest of oil barons, who have googled for tips on how to bet on crude. They could usually do this through exchange funds and oil company stocks, because buying real oil is expensive and complicated.
But experts say now is one of the most dangerous times to invest in oil, given unprecedented turbulence in a market racked by the coronavirus crisis and oversupply.
Google searches for terms such as "how to invest in oil" and "how to buy oil stocks" soared on Monday when US crude prices turned negative for the first time in history, a landmark event indicating that merchants were paying to get rid of things.
The idea of being paid to keep a barrel of oil may sound attractive to ordinary investors. But traders were actually scrapping futures contracts, or deals to receive physical barrels of oil that would arrive in May. The standard contract is for 1.000 barrels, each of which contains 42 gallons of oil.
Futures contracts
That means someone who got hold of a futures contract at a negative price on Monday is expected to pull those 1.000 barrels out of a storage facility, like the giant hub in Cushing, Oklahoma. If they couldn't, they would still be on the hook for the price of oil plus interest or other penalties imposed by their broker, a commodities trader said.
To avoid keeping 42 gallons of crude next to their lawnmower, everyday investors could buy shares in an exchange-traded fund, or ETF, that tracks oil prices. A popular example is the United States Petroleum Fund, which is tied to the price of the current West Texas Intermediate crude futures contract.
Another way to invest in oil is to buy shares in oil companies. Experts say the safest bets are big players like Exxon or Chevron, who are better positioned than most to weather the current storm.
But such actions have risks of their own, such as a growing shift toward electric vehicles and other environmentally friendly infrastructure. In addition, it is not known when the price decline will end, as coronavirus-related closures keep oil demand low.
Dividends within the sector
In times of market turmoil, one group of stocks that investors can count on for reliable income growth is the Dividend Aristocrats - an elite group of companies that have produced at least 25 consecutive years of dividend increases.
During the 2010s, these high-quality stocks averaged 14,75% per year, outperforming the S&P 500 by 1,2 percentage points. A big reason for the Dividend Aristocrats' superior performance, especially in the long run, is the high dividend component of their returns.
Studies by Standard & Poor's have shown that more than a third of the long-term total return on stocks comes from dividends. In the case of Aristocrats, many of them traditionally do not have attractive returns for new money. But investors who stick with them long-term are rewarded with increasing "returns on cost" over time.
Reliable payouts also help make this pool less risky than most stocks. For example, the volatility of Dividend Aristocrats' returns during the 2010s, measured by standard deviation - a measure of how widely or narrowly prices are dispersed compared to an average - was more than 9% lower than the S&P 500.
That does not make them invulnerable to market downturns. A number of Dividend Aristocrats have discounted, losing 10%, 20%, even 30% of their value since the start of the bear market. But they offer more than cheap prices, they offer real value, both in higher than usual returns, and in the potential for recovery once the market rebounds. For example, the following company that we are going to mention below:
AbbVie (ABBV, $ 75.24) expects its pending $ 63 billion merger with Allergan (AGN) to offset the slow growth of its successful drug Humira. AbbVie initially said that the merger, which is experiencing coronavirus-related closing delays, would create a combined business that would generate more than $ 30.000 billion in sales this year, and then single-digit growth for the foreseeable future. Where it is necessary to stress that the current economic turmoil is likely to curb those expectations a bit.
AbbVie develops drugs for autoimmune diseases, cancer, virology (including HIV and Hepatitis C), and neurological disorders. And indeed, one of the company's HIV drugs (Kaletra) is being tested as a treatment for the coronavirus. Meanwhile, Allergan is best known for its cosmetic drug Botox and its Restasis dry eye treatment. Wall Street companies like Allergan's strong Botox-related cash flow, which they believe will enhance ABBV's growth opportunities.
The debt burden after the acquisition will be high at $ 95.000 billion, but AbbVie expects to cut $ 15.000-18.000 billion in debt by the end of 2021, while also realizing $ 3.000 billion of cost synergies before taxes. The combined business generated $ 19.000 billion in operating cash flow last year.
ABBV shares look cheap at only 7,5 times future earnings estimates, which is modest compared to the company's historical average of 12 P / E going forward. Investors in dividend growth will like AbbVie's 48 consecutive years of rising earnings; a conservative 48% earnings ratio that provides flexibility for dividend growth and debt reduction; and a 18,3-year annual dividend growth rate of 6%. ABBV is also among the highest-yielding Dividend Aristocrats north of XNUMX%.