Time to snap up oil stocks?

By Norm Rothery on December 11, 2014
Estimated reading time: 4 minutes

Book your losses before the holidays for a tax break and don't be in a rush to buy too many commodity stocks

The price of oil hit $107 per barrel this summer. But it recently tumbled below $61 per barrel and the sharp decline took many oil stocks down along with it. Question is, should investors take the opportunity to load up on oil stocks or does the low price of oil augur poorly for the market, and the economy, more generally? Before touching on that weighty question, you should know that I’m not a big fan of resource stocks in general. Here are a few reasons why:

Commodity producers lack pricing power. Simply put, one pound of copper is pretty much the same as any other. Both will fetch very similar prices depending on how far they have to travel to reach consumers, how pure they are, etc.

On a related note, mature resource stocks are strongly linked to the price of the commodity they produce. Problem is, I’ve yet to find a good way of forecasting commodity prices.

Even worse, technological advances generally push prices down rather than profits up. As a result, commodity prices have generally declined over the very long term on an inflation-adjusted basis.

In addition, the Canadian economy is itself linked to commodity prices. Generally speaking, the economy does well when prices are high and poorly when they’re low. (Mind you, there are some notable regional variations.) As a result, when Canadians stuff their portfolios full of resources stocks they’re making a double bet that could unravel in bad times.

The broader question of where the economy, oil prices, or the market is going is—alas—above my pay grade. I really don’t know. Practically speaking, I prefer to keep a firm eye on individual companies rather than trying to figure out the big picture stuff, which is devilishly hard to profit from. (It’s yet another reason why I shy away from resource stocks.) But, in the spirit of making lemonade out of lemons, if you’re sitting on losses in a taxable account then booking them before Dec. 24, 2014 for tax purposes might be a good idea. If you still like the stocks you sold, you can always buy them back 30 days later. Mind you, the tax benefit comes at the potential cost of missing out on a sharp recovery, should one occur. On the other hand, brave buyers might try to take advantage of the lower prices. For my part, I’m in no rush to dive headlong into commodity stocks, but their prices are starting to look pretty good.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders. The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada. My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as earning more than they pay in dividends. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done. Here’s the updated Safer Dogs of the TSX, representing the top yielders as of Dec. 8. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase—barring some calamity.

Name	Price	P/B	P/E	Earnings Yield	Dividend Yield
BCE (BCE)	$52.09	4.05	17.48	5.72%	4.74%
National Bank (NA)	$49.16	1.91	11.28	8.87%	4.07%
Bank of Nova Scotia (BNS)	$65.07	1.76	11.44	8.74%	4.06%
Rogers (RCI.B)	$45.12	4.42	17.03	5.87%	4.06%
CIBC (CM)	$101.63	2.29	12.93	7.73%	4.05%
Bank of Montreal (BMO)	$79.35	1.65	12.32	8.12%	4.03%
Potash Corp (POT)	$39.89	3.37	22.81	4.38%	4.01%
TELUS (T)	$41.11	3.09	18.03	5.55%	3.89%
Royal Bank of Canada (RY)	$79.85	2.37	13.26	7.54%	3.76%
Power Corp of Canada (POW)	$31.82	1.35	12.15	8.23%	3.65%
Source: Bloomberg, Dec. 8, 2014

Notes: Price: Closing price per share P/B: Price to Book Value Ratio P/E: Price to Earnings Ratio Earnings Yield: Earnings divided by Price, expressed as a percentage Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

New & Noteworthy

Value Investing and the Mis-measures of Modern Portfolio Theory Check out this video of Professor Bruce Greenwald talking about value investing and how to value stocks.

Just For Fun

This week’s challenge is to find a 7-letter word using the ticker symbols of Suncor Energy (SU), Imperial Oil (IMO), and Canadian Natural Resources (CNQ). Hint: They’re plants depressed investors might think about eating, but shouldn’t. *The answers to last week’s challenge are: colic and logic