Tuesday, November 29, 2005

Energy Stocks For The Long Run.

Jeremy J. Siegel, professor at the Wharton School and author of Stocks For The Long Run, weighs in, suggesting that energy stocks are not in a bubble and still have room for appreciation.

Kipplinger's Personal Finance: Black Gold Still Glitters

Quotes:

Nuts! That's my response to those who say the recent run-up in energy prices is a bubble. Prices for oil, natural gas and oil derivatives, such as gasoline, will remain high for some time. With rising demand worldwide, we've ascended Hubbert's Peak, named for geophysicist M. King Hubbert, who predicted that oil production would peak around the year 2000, causing the world economy to deal with a diminishing supply of black gold.

Does this spell disaster for the U.S. economy, hooked as we are on cars, air conditioning and other energy burners? The answer is no, although there certainly will be pain in the short run. I believe that retail Christmas sales could be soft, and I estimate that falling consumer spending could pare as much as two percentage points from economic growth in the fourth quarter.

But in the long run, the outlook is rosier. Because the recent price surge has hit us where it hurts, we have more time to solve the energy crunch. Remember the spurt in energy prices in the 1970s? That caused a burst of conservation and efficiency improvements that lowered the energy content of U.S. output by 50%. So to produce a dollar of economic output, we need use only half the energy we did a generation ago. That will happen again.

What does this mean for the average investor? The prices of oil and natural-resources stocks, as well as exploration and technology-oriented firms, are already up sharply. The energy sector now makes up 10% of Standard & Poor's 500-stock index, versus just 6% a few years ago. But that is still far shy of the 30% reached during the energy crisis of the 1970s and early 1980s.

We won't see a 30% share again, nor should we. Energy stocks, especially those related to oil exploration, became dramatically overpriced in the '80s and subsequently collapsed (the large integrated oil companies, such as ExxonMobil, did much better).

But I don't believe energy stocks are overpriced, as a group. Earnings are high and will remain high as long as oil prices stay firm, which appears likely. You should not dramatically overweight the sector, but it is not unreasonable to hold 10% to 20% of your stock portfolio in energy and natural resources.