Author: Tyler Kocon, Split Rock Private Trading
Covestor model: Equity Rotation
Disclosure: Long COP
When considering different ways to invest, you’ll find dozens of strategies that in principle aim to minimize risk, increase returns, and make it possible to grow money. As far back as most investors can remember, the traditional safe-house for the common investor has been the “buy and hold” strategy – or “buy and hope” as some call it. You know, buy yourself some shares of a blue chip company and hold on tight through thick and thin, the good times and the bad. While this remains a very popular strategy, in my opinion the foundation and evolution of the marketplace has made buy and hold archaic. In order to maximize your portfolio returns, you may need to be a little more aggressive and proactive with how you decide to invest your money.
Sometimes, the easiest way to make an active trade is to take a look around and observe what’s happening in your world. In December, it is safe to assume that half of the country is covered in whimsical white snow, prompting thermostats to kick in and traveling to slow considerably in comparison to the summer months. Historically, this is the time to strike on major oil company plays.
Investors may gain additional benefits by adding an energy sector focused ETF into their portfolios. An ETF like IYE (iShares Dow Jones US Energy Sector) can provide exposure to all different forms of US energy stocks.
When considering a similar investment, timing becomes paramount. Holding a security such as this only becomes positive if an investor understands when the markets will no longer support the growth of their investment. In this case, consider the drastic drop-off of oil prices during the middle of the summer months. As the major traveling season winds down, the demand for oil tends to bottom around the middle of July. This is a common, timing-specific trade we like to make. Picking up this ETF in mid-December and holding it to mid-July has proven time and time again to be a sound investment.
We tracked IYE over the past eleven years, from the second Monday of trading in December until the second Monday of trading in July, and correlated that to an identical timeframe for the S&P 500. Over this period, holding IYE proved to outperform the S&P 500 73% of the time. In fact, IYE beat the S&P seven out of the eleven compared years (according to historical stock price closings provided by Yahoo! Finance). Over the same timeframe (mid-December to mid-July), IYE produced an average return of 5.90% over the past eleven years (according to historical stock price closings provided by Yahoo! Finance). Comparable numbers for the S&P 500 provided an average return of -1.59% over an identical timeframe (Yahoo! Finance).
This prompted our research team here at Split Rock Private Trading to take a deeper look into more specific oil company stocks for our Covestor Equity and Commodity Rotation Portfolio. One company of particular interest was energy powerhouse ConocoPhillips (COP). COP operates as an international energy company dabbling in six specific business segments, from exploration to marketing of energy products. Our interest in COP stemmed from the fact that 63% of their total assets derive from resource exploration and production, exposing them to the same general market as IYE (COP 2010 Annual Report). In fact, upon comparison of COP to the S&P 500 using the same timeframe and format described above, we discovered that COP enjoyed even more profitable gains during this period and outperformed both the S&P 500 and IYE (according to historical stock price closings provided by Yahoo! Finance). From the second Monday of December to the second Monday of July for the past eleven years, COP averaged a 9.20% return compared to S&P’s previously stated -1.59% and IYE’s previously stated 5.90%.
Simple math shows that an investor making this seven-month play has enjoyed gains 10.79% better than had they simply bought the S&P and decided to hold. Active money management shows its advantages in this example, assuming the manager got the timing right.
Traditional investors, however, would also be prudent to take advantage of COP’s significant 3.87% yield (as of 12/15/2011 according to Google Finance). Its healthy yield, coupled with proven historical gains, make COP a solid investment during the winter months, in our opinion.
The presence of such a desirable yield could also act as a safety net in instances where history is proven wrong. This high yield provides the investor some much-needed wiggle room as the stock market continues to navigate this trying period in financial history.
