Friday, November 28, 2014

Calling all contrarians: What would Warren do?

About three weeks ago, I wrote about possible contrarian plays in the oil patch (see Do you have what it takes to be a contrarian investor?). I had pointed out that Warren Buffett had taken large stakes in Suncor (SU) and ExxonMobil (XOM) in Q2 2013 and the closing price of those stocks are approaching the top of the zone where Buffett made his purchases. For contrarian value investors, this could be a rare opportunity to step up and buy at depressed prices. Here is the chart of SU

Here is XOM:

$80 oil?
On the bottom panel of each chart, I have shown the ratio of each stock to the WTI oil price. Given how oil prices have cratered in the last couple of days, the SU/oil and XOM/oil are at considerably higher valuations than the Buffett buy zone, which indicates that the price of these two stocks are nowhere near valuation levels where Buffett would buy again.

As the oil market is in turmoil, the price of crude is likely to be volatile and current prices is unlikely to be the long-term equilibrium price. One sensible comment that I saw today came from Neil Irwin, who tweeted that the futures curve was discounting a 5-year price of roughly $80:

$80 is certainly a better level than the closing price Friday and about $10 below where Buffett made his SU and XOM purchases.

A near-term bottom for oil?
Indeed, the market psychology may be getting close to a temporary bottom, when I saw Ian Bremmer, who is a political analyst, tweet the following comment on a topic outside his area of specialization:

These kinds of sarcastic comments are closely related to the magazine covers effect, where the general public seizes on a market condition when it`s very late in the game - and they mark a market turning point. Most recently, well-known investment professional and blogger Josh Brown tweeted this irreverent comment

...right before the market open on October 15, the day of the most recent market bottom.

It is said that value-oriented contrarians buy when blood is running in the streets. Is there enough blood in the streets yet?

What would Warren Buffett do?


bobster747 said...

Cam, Buffett also bought IBM, now look where it is today. Maybe he isnt foolproof!

wsquon said...

To give a clear answer on Buffett's call on IBM you have to remember that he is thinking in terms of 5, 10, and 20 yr increments. Sure, any stock will ride up or down as business cycles go up and down, and CEOs come and go. But where will the company be at the 5, 10, 20 yr markers?