Thursday, July 07, 2005

Fund Managers Gone Wild!

There was an article on the front page of USA Today [I don't actually buy the thing - I borrowed it.. sniff..] about general mutual funds loading up on energy stocks, but I can't find it to link to it.

I would say this is bad news, but the funds they highlighted included CGM Focus Fund, FPA Capital, Fidelity Contrafund, and Fidelity Leveraged Company Stock. All of these funds have good track records and smart managers.

CGM Focus is nearly 49% in energy!
FPA Capital is something like 25% in energy.

Read the March report from FPA Capital here. He likes the drillers, and absolutely hates the financials.

Read the December report from CGM Focus here. It's old, but he still likes MUR I believe. He dumped all his homebuilders and steels recently though.

Additionally, David Dreman is pushing the oils in his latest Forbes column "Black Gold".

[Amusingly, David Dreman and Robert Rodriguez from FPA Capital are well known contrarians!]

Then there is this article from USA Today: "Natural Resources Funds Strike Oil".


The question for investors: Will the oil run continue? John Segner, manager of AIM Energy fund, thinks so. He estimates that worldwide oil demand is 84.2 million barrels a day. And producing capacity is 85.5 million barrels. "There's very little excess capacity," Segner says. "If the global economy were to grow 2% a year, that's another 1 million barrels of new demand."

Demand may be growing faster than expected: June car sales were almost 1.7 million units, up nearly 16% from a year ago, according to Autodata. Most of that increase came from a General Motors promotion. Nevertheless, it may also signal a stronger-than-expected economy, which, in turn, means higher demand for oil.

Normally, when demand increases for a commodity, supply does, too. Eventually, more supply means lower prices. So when will we see $30 oil again?

"Never," says Timothy Guinness, manager of Guinness Atkinson Global Energy. The appearance of new supply may not be as large as optimists believe, he says. "There aren't many new Alaskas out there. The Caspians have been a big disappointment, and deep-water drilling is proving tougher than anticipated."

In the next few years, oil prices could average $55 to $85 a barrel, depending on how much supply comes on line and how oil companies behave. "Why find extra oil if it brings the price down?" Guinness says.

In the long term, he says, a "hugely persuasive" case can be made that producing will peak in 25 years.

AIM's Segner believes most oil stocks reflect oil prices at $35 a barrel, which means there is still time for the stocks to run, assuming oil stays high. Stocks of oil services companies - firms that keep oilfields running - typically sell for higher price-earnings ratios than the Standard & Poor's 500-stock index. (A stock's P-E ratio is its price divided by its past 12 months' earnings; lower is cheaper.) They currently have lower P-Es than the S&P 500, Segner says.

Guinness, whose fund's 31.5% gain ranked it first among all stock funds the first half of this year, is avoiding speculative exploration stocks. There's no reason to stretch for stocks with potentially high earnings at this point in the game. His fund has concentrated on midsize integrated oil companies, such as Occidental Petroleum and Amerada Hess.

Another area of interest: Canadian companies that are developing oil from oil sands, such as EnCana.

All commodities are volatile, and oil particularly so. Big new oil fields or slow economic growth could send oil prices and oil stocks tumbling. Right now, that doesn't look likely. "The economy is doing much better than I would have thought, given the price of oil," AIM's Segner says. "To me, it's quite surprising."

Nothing's a sure thing, and soaring oil prices have their skeptics, too.

Bill Wilby, director of equities at OppenheimerFunds, is one. The commodities markets have big swings between shortages and surpluses - and price is what determines the difference between the two. "The higher the price, the higher the supply response will be," he says.