Welcome to the end of the week! Just sit back, relax, and enjoy this weeks roundup in another edition of Happy Hour.
Short Term Opportunities
Jeremy Grantham, in the recent GMO Quarterly Letter (PDF), offers his perspective on the state of the markets, along with a discussion on the history and future of oil. The market info is a good read, but his thoughts on fossil fuels were interesting. He points out how oil has been a driver or a drag on the global economy depending on the price.
Oil is a sector I’ve watched for a while because I own one stock that hasn’t lived up to expectations. The main reason, or at least my theory, is falling oil prices. This Upshot article explains why it happened. Grantham covers this as well.
While the rest of the market has moved higher this year, oil has done the opposite. You probably noticed cheaper gas prices when you fill up the car. This is due to a recent fall in oil prices. The oil stocks have followed suit. At the same time, low oil prices, combined with less than stellar earnings, are driving alternative energy stocks lower too.
This is a good example of what a short-term opportunity looks like.
The market is a system that measures the value of sectors and industries. In the short-term, any one of those niches can move in the opposite direction of the market depending on how investors view the news around it. Within those niches, single stocks can move independent of it for the same reasons.
Current low oil prices offer an opportunity since it has dragged down every oil producer, explorer, and service company this year. This is the type of temporary event that drives stock prices lower but eventually offer great returns.
There’s a good possibility that oil could be lower in the next few months and stocks fall further. But over the long-term, oil prices will rise and stocks will follow. That is, until alternative energy reaches a scale to undercut oil prices significantly.
The likelihood of that happening depends on innovation in alternative energies and the ability to store and distribute that energy cheaply. Simply, current alternatives are comparable to oil prices today. Those alternatives still have years to go before they have a major economic impact.
Grantham believes alternatives need to reach $50/barrel equivalent pricing before it boosts global economic growth. Simply, we’re maybe a decade or more away before any of this happens. But investors only need it to be slightly more competitive to drive growth.
Nobody knows who will be the future market leaders in the alternative energy space, but now seems a good as any to start looking. Someone looking beyond the next few months might find a long-term investment worthy of their money.
My personal concern is how commoditized the solar panel business has become. And energy storage seems to be the final frontier. Several companies build solar plants, through partnerships or independently, to lease the power to utilities.
This is an area Buffett has spent a lot of cash on lately. The cash flow potential is enormous thanks to the big upfront cost of building the plant, with a small annual operating cost for maintenance and upkeep afterwards. I could easily see, decades from now, a few solar companies who transitioned from panel and plant builders to major solar power generators who happen to sell panels.
- The Folklore of Finance: Beliefs That Contribute to Investors’ Failure – N.Y. Times
- The Only Performance That Matters – Certifiable Planner
- Greenblatt: Strategy Change – Wealthtrack
- Why You Should Be a Risk-Taker – Morningstar
- Why I Love Investing – M. Housel
- It’s Investor Behavior, Not Investment Behavior That Matters – Irrelevant Investor
- Why We need Stock Prices to Fall 25% – Marketwatch