There is no shortage of impressive models and returns on Covestor.com. One top model is run by manager Alejandro Paschalides, who’s Energy model has done very well so far this month. In order to get an idea of the steps Paschalides had taken to achieve these results, we sent him a few questions about recent transactions in his model.
Covestor Live: So far this month, your Energy model is performing quite well this month. What steps did you take to achieve this?
Alejandro Paschalides: I noticed that many of the offshore drillers had been hammered as a result of the oil spill. The cash flow multiples of these companies are at very attractive levels, with some names trading near multi-year lows despite tremendous growth and higher oil prices since then. For a long-term minded investor willing to hold through short-term volatility, these are ideal names to be invested in. I think there is still plenty of room for growth in these names even with relatively stable oil prices for the next year, which is key because that is what I expect in the commodity. Oil at $80 is fair value based on fundamentals, any higher and we risk recession and lower and increased demand will act as a price floor.
CL: How have recent events, specifically—the BP oil spill—made you change or adjust your strategy in this model?
AP: The BP oil spill provided a prime opportunity to “double down” on companies with offshore drilling exposure, specifically deepwater exposure. The reserve mix continues to shift towards deepwater assets and this will only continue going forward. The Gulf of Mexico only represents part of the offshore marketplace and companies such as Diamond Offshore Drilling Inc (NYSE: DO) were beaten down despite relatively small exposure to the GoM. I actually had small bets on BP outside of this model, which paid off well, but I did not feel it made sense for this product, especially because commissions would have eaten into such a small position. In the model, I did put in some money into Anadarko Petroleum Corp (NYSE: APC), since I felt the optics and risk were better relative to BP Plc (NYSE: BP).
CL: In the middle of July, you shorted Claymore NYSE Arca Airline ETF (FAA). What made you do this?
AP: I wanted to reduce the net long exposure of the portfolio but not in a way that I would be betting against oil prices. I think the economy is frothy; I see oil stable or going up short term but declining somewhat as the economy weakens. Airlines do poorly when oil prices rise and when the economy weakens. This is a good way to lower volatility for the portfolio relative to general market movements while still maintaining a long exposure to oil and energy stocks.
CL: What factored into your decision to buy Noble Corp (NYSE: NE) in July?
AP: Noble Corp was also beaten down just like all the other offshore drillers. There is nothing too stock specific here, really, multiples are attractive just like all the others and I wanted to diversify within the sub-sector.
CL: It looks like the most recent sale in your model was of Market Vectors Nuclear Energy ETF (NLR) on July 14th. Why did you decide to sell this position?
AP: NLR is a great ETF to gain exposure to uranium, since it has some uranium miners and utilities which use a lot of nuclear power. I still think this is a good investment, but I wanted to increase exposure to oil, specifically the offshore drillers, and something had to go to make space for that.
