Zacks analyst Nilanjan Choudhury on Wednesday recommended a handful of oil stocks, despite crude’s recent sizable pullback off of 2016 highs. Let’s take a look at Choudhury’s picks and examine some ETF alternatives.
A Brief History of Oil’s Boom, Collapse, and Recovery
Oil is one of the world’s most volatile commodities. Its price has been known to whipsaw 5%, 10%, 15% or more in a single day. Even on a longer-term basis, oil price changes can be gut-wrenching.
Let me set the scene for you. It’s July 2008. Equities have begun to break down, but the financial crisis hasn’t yet come to a head. Oil hits a new all-time high of $145.31 per barrel. Analysts are setting price targets of $200, even $300 per barrel.
And then, the bottom falls out. The financial crisis drags asset values of every shape, size, and flavor down with it. Oil will fall more than $100 by the end of 2008 to under $40 per barrel.
Oil recovers quickly, however, jumping back to the $100 level within two years. It bounces around the $110 to $80 range until late 2014, when the unthinkable happens: the bottom fell out again.
By spring of 2016, oil briefly touches just $25 per barrel. Analysts and investors wonder if oil companies can weather the storm this time. As prices quickly bounce back up toward $50, stock pickers begin to place bets on the companies best positioned to ride out what promises to be continued volatility — and the prospect that oil prices between $40 and $50 (rather than $80 and $100) may be the new normal.
Zacks: Buy These Four Oil Stocks
Enter Zacks analyst Nilanjan Choudhury identifies four oil stocks for investors to consider:
- Chevron Corp (CVX) – Choudhury lauds CVX’s recent climb to a new 52-week high, solid pipeline, and cost-cutting plan.
- ConocoPhillips (COP) – Choudhury likes COP because it’s the world’s largest integrated oil play, recent dividend cut that will free up cash, and lower capex plan.
- Suncor Energy Inc. (SU) – The largest energy company in Canada, Suncor has been shedding extraneous assets as of late. The funds generated from these sales should be used to bolster its core businesses, with plenty of growth opportunities.
- Apache Corp. (APA) – Upstream play APA has “initiatives to align capital spending with its cash flows while continuing to build a high-quality inventory of projects capable of delivering attractive returns even in a low oil price environment,” says Choudhury.
Or, Buy These ETFs Instead
If single stocks aren’t your thing, there are plenty of Oil ETFs to choose from if you’re looking for exposure.
United States Oil Fund LP (ETF) (USO) is the simplest way to play oil’s recovery. This index tracks the price of crude oil, providing returns roughly equivalent to actual oil prices. USO has lost some 39% of its value over the past year, but is up more than 18% in the past six months.
USO shares rose $0.15, or +1.4%, to $10.90 in premarket trading Thursday.
Another popular oil ETF is ProShares Ultra DJ-UBS Crude Oil (UCO). This one is more for day traders than long term investors, however, because it’s a leveraged ETF that provides roughly 200% the daily performance of the Dow Jones UBS Crude Oil Sub-Index. In other words, if oil rises 1% in a day, this ETF will rise 2%. The same is true for the inverse — if oil takes a hit, this ETF will take accept twice the blow.
Oil is a hot commodity these days (but when is it not?), seemingly always making headlines due to its extreme volatility and geopolitical (not to mention environmental) implications of its extraction, refinement, sale, and usage.
While a handful of single oil stocks may offer some good opportunities for investors, most are probably better off sticking to USO instead — just as they are likely better off in the long run owning SPY rather than trying to pick a basket of stocks themselves.