The Commodities Futures Trading Commission, a regulatory agency based in Washington, DC, reports that bullish bets on oil from hedge funds, private equity groups, and others are now at a five month high.
Preqin, a financial data house, reports that private equity groups are retreating from investing in alternative energy as 87 percent are underperforming the median returns for the industry.
Follow the Lead or Get Slaughtered?
For investors, following the lead of Big Money such as hedge funds and private equity groups can be useful.
Big Money is not always right. Pretty much all were wrong in the lead-up to The Great Recession. But hedge funds and private equity groups do influence the market. Big Money is useful for giving directions as to trends in investing as hedge funds and other institutional investors drive the financial exchanges, to a large extent.
Big Money is now telling investors that oil and natural gas companies are attractive.
There’s Big Appeal in Energy Stocks
Previous articles on The College Investor have emphasized the appeal of oil stocks ranging in size from ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-A), the two largest in the world, to Mondial Ventures (OTN: MNVND), a small cap operating in the fossil fuel rich region of Texas. No matter what the market capitalization, oil companies have unique features that makes these alluring long term investments. That applies for income, growth, and value investors. For many of these reasons, legendary investor Warren Buffett is a major shareholder of ExxonMobil and Phillips 66 (NYSE: PSX).
For income stocks, it is difficult to beat major oil firms such as ExxonMobil and Royal Dutch Shell.
The average dividend yield is just under 2 percent for a member of the Standard & Poor’s 500 Index. The dividend yield for Royal Dutch Shell is over 5 percent. For ExxonMobil, it is nearly 2.7 percent. It is around 2.05 percent for Phillips 66.
For growth and value, investors need to turn to small caps like Mondial Ventures and Hercules Offshore (NASDAQ: HERO), among others.
ExxonMobil, Phillips 66, Royal Dutch Shell, and other major oil and natural gas firms grow at a steady rate. As an example, Hercules Offshore is expected to have earnings growth of 22.0 percent next year. But for ExxonMobil, earnings-per-share growth over the next five years is projected to be 3.50 percent. For Phillips 66, it is expected to be 6.75 percent. Not exactly jaw-dropping numbers, but both firms have drawn in billions from Buffett as investments!
Global Demand is Rising
The International Energy Agency predicts that the global demand for energy will increase greatly in the decades ahead.
Much of that will be filled by the oil and natural gas industry. Coal is too dirty. Alternative energy does not have the ability to meet the needs of the mass market.
As with all investing, diversity in the oil and natural gas sector is advised.
Investors can easily create a portfolio with oil and natural gas stocks that provide the growth, income, and value features that all holdings should carry. There is nothing wrong and everything right with owning oil and natural gas stocks ranging in size from ExxonMobil to Mondial Ventures. Over the last week of market action, ExxonMobil is up nearly 4 percent. For the same period, Phillips 66 is up almost 3 percent. That is what happens when big money starts to buy!
Do you follow big money when making your investing decisions?