Gas Prices! Energy companies are smiling
5-20-07: As gas price continues to climb, there is little evidence people are altering their driving habits. Don’t expect this to change anytime soon because there is little we can do about it. The lack of mass transportation infrastructure provides very little options for most of us. Driving has become a necessity in most cases; it is part of our culture. All these talk about alternative energy is horse crap since any real solution is years away. The fact of the matter is we are stuck and need to drive. The question before us today, is it too late to get into the Energy sector?
We predicted in the beginning of the year when oil was trading in the low $50 per barrel, it was simply a temporary phenomenon and that people should buy energy stocks such as Halliburton (HAL) and Valero (VLO) because they were undervalued. Those of us that went against the market are now sitting back smiling as HAL and VLO are up 24% and 40%, respectively, since January.
We believed although these stocks have both appreciated nicely, there is still room for further appreciation. HAL should be a $40 stock. VLO should be $80. In our view, we will soon see $70 per barrel oil in the next 3 months. This will translate into at $4 per gallon for drivers. We plan to continue buying these stocks whenever there is a weakness.
The way we see it, oil prices will continue to climb. Gas price will be above $4 per gallon this summer. Places like California will be worse given their strict gas regulation. Despite the increase in gasoline prices, the demand for the large trucks and SUV are actually up. Check out this article from the sfgate.com. Amazing! This mean stock such as VLO and Halliburton will continue to do well. In fact, this Memorial Day, everyone and their brothers are expected to be on the road.
It now takes about $50 to fill up. This money has to come from somewhere. The most logical place is the money we spend on non-essential things such as restaurants and clothes. For now we are staying away from retail stocks as they will be first victim of high gas price. The other day we sold off Home Depot (HD) and Target (TGT) while we were still up on the position. We also took some money off the table from McDonald’s (MCD). While MCD has been a great performer, trading at $50 per share, it was time to take profit.
What are your thoughts on this subject? Where do you think gas price will be? Which company do you think will be benefit most?
Comments
Gas prices will def continue to rise. We are willing to pay $4 for a coffee, $4 for gas has become something we accept IMO. My only fear is govnt. regulation. I expect VLO to cover up some of their profits in second Q through some manipulation of books and show those profits in 3rd Q when prices have dropped.
Posted by: Farzad | May 21, 2007 05:35 AM
Hey,
Great site! I've been following it for several months now. A while back you asked what stocks we would like to be discussed. I have one I am kind of interested in and was wondering what you might think of it? Jones Soda Company (JSDA) recently reported earnings and tanked, but perhaps now is a good time to buy? The stock has seen a lot of publicity lately, and was talked about by Jim Cramer. I personally think the product is great and love its growth potential. Fundamentals seem ok to me, but I am new to investing and so don't have much experience with fundamental analysis. What do you think?
Posted by: Investor | May 23, 2007 08:07 AM
Hi Investor,
Thanks for dropping by. JSDA is indeed an interesting company. We just posted our opinion of the stock. Come back soon. Thanks.
-iBooyah team.
Posted by: Ibooyah | May 23, 2007 08:48 PM
Most of the big oil companies have all now passed their all time high. Do you think it is still a buy even in the short run? (2-3months of owning)
Posted by: shraz | May 23, 2007 09:56 PM
Hi Shraz,
Good question. Although the oil companies have been running up and surpassing their all time highs, we believed they will continue to go up until the end of summer. This is assuming the current rally holds.
If one were to buy at this level, it is obviously more risky, but we do believe there is still more upside in the big oil..but careful though, when it come downs it will be with vengeance. Good Luck.
Posted by: ibooyah | May 24, 2007 06:20 AM