Sunday, June 01, 2008

To Fadel Gheit, with love.

Something to think about, though I'd cite Tim Evans as a bigger skeptic, and so far, totally wrong.

MSN Money: The end of the oil stock rally.

When everyone agrees that oil stocks are the thing to own, where is the supply of new buyers going to come from? And without new buyers, oil stock prices will stagnate and then fall.

Fortunately, not everyone is convinced yet. Oppenheimer oil analyst Fadel Gheit, for example, continues to write that, fundamentally, oil shouldn't trade at more than $55 a barrel. To which I say, God bless. The minute the last skeptic turns into a believer and bellies up to buy oil shares, the rally in oil stocks is doomed.

Still, I'm worried there aren't enough skeptics left. Oil stocks have looked increasingly frothy this year. One sign of that is the huge gains being racked up by obscure small-cap stocks in the sector. These are exactly the kinds of stocks that attract the extreme momentum traders as a sector nears a top.


Here's some advice
So what does all this mean to you? Five things:

* If you haven't bought oil stocks yet, I'd wait for a correction rather than chase them here.

* If you own oil stocks, you might want to take some profits in the sector. There's no need to sell everything, but check to see whether your portfolio is out of balance, and trim back your exposure to the sector.

* If you need to add energy stocks to your portfolio, take a look outside oil. Natural-gas stocks, for example, haven't had nearly the run that oil stocks have, and natural gas is still well below its historic peak of $15 per million British thermal units. If you need a suggestion or two in the sector, check out Chesapeake Energy (CHK, news, msgs) and Ultra Petroleum (UPL, news, msgs) in Jubak's Picks. Devon Energy, in that portfolio, is a big natural-gas producer, although not a pure play like Chesapeake and Ultra.

* Remember that the key to making money in the stock market is to buy low and sell higher. It's time to start looking around for unloved stocks in other sectors.

* We're by no means near the end of higher oil prices or of higher prices for oil stocks. Just wait. If oil drops to $110 -- the new floor, in my opinion -- you'll hear a huge chorus of doom saying that $50 a barrel is just around the corner.

That, of course, will be the time to buy.


At the time of publication, Jim Jubak owned or controlled shares in the following companies mentioned in this column: Chesapeake Energy, Devon Energy, Joy Global, and Ultra Petroleum. He did not own short positions in any company mentioned.