A Market-Beating Oil Basket Bet

 | Sep 28, 2016 | 2:43 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:














Back on Jun. 7, I recalled the famous trade Sir John Templeton made back in 1939. In the midst of a market meltdown, Templeton bought $100 of every stock trading below $1 on the New York and American stock exchanges. He paid about $10,400 for this basket of 104 companies, of which 34 ultimately went bankrupt. However, Templeton still managed to sell the rest four years later for more than $40,000 -- or a roughly 300% return.
Templeton, whether he realized it or not, created what might be referred to as a basket bet. Essentially, buying a basket of similar stocks is an intelligent way to bet on a particular category without the exposure of one particular stock that may or may not work out. Years back, Warren Buffett made this type of trade with South Korean stocks. Seeing that Korean stocks were trading for low single digit price to earnings ratios, Buffett looked through a stock manual and created a basket of the more-attractive ones. Not having an edge in Korea, Buffett was simply betting that such cheap valuations would rise over time -- and that by owning a basket, he would benefit from that viewpoint.
In my Jun. 7 column, I suggested creating a basket of oil stocks. Many energy stocks were trading for a fraction of what they used to, given the pounding that the segment has taken. And it was likely that some oil-and-gas firms would either go bust or face slow, painful declines, while others would probably see their share prices rise to several multiples of current levels.
The names I suggested to include in the basket seem to be working as you might expect -- some huge winners, a few laggards, but overall a better-than-average result.
Chesapeake Energy (CHK) is up about 50%;  Comstock Resources (CRK) is up 50%;  Exco Resources (XCO) is down 3%;  Bellatrix Exploration (BXE) is down 10%;  Kosmos (KOS) is up about 4.5% and  Memorial Production Partners (MEMP) is down 22%.
Since a basket bet is equally weighted by dollar amount, this group of stocks is up approximately 12% over the past three and half months. The Energy Select Sector SPDR ETF (XLE) is down nearly 3% over this timeframe -- and most other energy-related ETFs are down as well. The basket approach has crushed its benchmarks. Even the S&P 500 is up only around 3% during this time.
Templeton's trade was a gift to investors. Smart investors utilize this basket approach all the time, because it works -- when implemented correctly and patiently.

Columnist Conversations

As far as TSLA is concerned, I still have a higher target above the market at the 409 area.  I stated in ...
The TLT setup discussed in my last commentary is a bust. Key support was violated and it violated the recent l...
BBY is getting smoked this mornings(weak forecast).  The stock is off 8% after opening the session with a...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.