I think one of the most difficult factors that an investor faces when they’re considering buying stocks is the future. Obviously, no one can predict the future, but we need to diversify our portfolio so that it can protect our wealth and grow over time—meaning that investors need to think long-term when buying stocks and consider the future, no matter how abstract it might seem.
When looking at different market sectors, buying stocks in diverse parts of the economy can help to reduce overall portfolio risk and generate positive returns.
With all of the uncertainty in the world, one thing of which I am quite certain is that 10 years from now, oil prices will still be an important issue for the majority of the world.
While it’s great to see electric cars for sale, let’s be honest: these cars are expensive, and the vast majority of the world will continue to consume oil. This means that oil prices will be an important factor for many years.
I think it’s important to consider buying stocks of energy-related companies as part of a well-diversified portfolio. Some of the obvious reasons include the fact that oil prices are still quite high, and as we continue to use up our resources (limiting supply), they will continue to remain elevated due to consistent demand.
Another factor that many people don’t necessarily associate with oil prices is that energy is also a hedge against inflation. Don’t forget: inflation means a rise in prices. If an economy experiences inflation, this indicates that many parts of the economy will see an increase in price, including real estate, the stock market, and commodities, such as gold and oil.
However, buying stocks in the energy sector can be fraught with risk. Because many companies take on debt and are hoping for positive returns on their properties, buying stocks of a small company can be extremely risky. Even if oil prices remain high, if a small operator has operational issues, such as a lower-than-expected yield of oil, this can have a severe impact on the stock.
Another factor to consider when buying stocks in the energy sector is that costs are continuing to rise. As the easy-to-obtain oil has already been found and pulled out of the ground, we are increasingly going deeper, using increasingly difficult methods to obtain oil. Part of the cost is being passed along in oil prices, but part of it will also be factored into the financials of energy companies themselves.
Another way to profit from higher oil prices is by buying stocks of firms that provide services to the oil and natural gas industry.
One company that I’ve liked for a long time has been Halliburton Company (NYSE/HAL). This is a massive company with operations around the world. They are the technological leader and innovator in oil and gas extraction.
Increasingly, as more properties around the world need expert advice and knowledge in extracting extremely hard-to-find oil, companies like Halliburton can provide these services.
Chart courtesy of www.StockCharts.com
The above chart notes the activity in Halliburton’s stock price and oil prices over the past year. As you can see, they are fairly correlated. In fact, over the past year, Halliburton has been far more stable and less volatile than oil prices.
Buying stocks when they are near their 52-week high is always a difficult proposition, especially considering that much of the move up in oil prices has been related to the escalating conflict in the Middle East. Naturally, one would prefer to be buying stocks when they pull back and become attractive from a pure valuation perspective.
However, for long-term investors who are looking to protect themselves against inflation and participate in higher oil prices, I would certainly consider buying stocks that provide services and advanced technological abilities in the energy field.
This article What to Consider When Buying Stocks to Profit from Oil Prices was originally published at Investment Contrarians