What do the following numbers have in common: 230%, 100%, 115% and 45%? They are the stock market returns of Chesapeake Energy (CHK), Sanchez Energy (SN), Consol Energy (CNX), and Comstock Resources (CRK) over the past six weeks.
These companies were not arbitrarily chosen, but rather businesses I have written about in the last 12 months. These magnificent returns are in no way to say, "I told you so." In fact, despite these advances, all of these securities are well off levels from six months ago and some are still down in 2016. Consol Energy is up about 30% so far this year.
No, the reason why I illustrate these return figures is to support my view that market prices ought to provide you with the guidance you need to make sound investment decisions. Everything else -- macro, forecasts, estimates -- is nonsensical.
Let's take Chesapeake Energy. On more than one occasion as Chesapeake shares were falling into the mid-single digits, I noted that the market price was wrong. Either shares were going to zero, which I didn't believe to be likely, or over time the intrinsic price was a lot more than the current market price. As shares declined into the abyss last month down to $1.50, the situation became even more pronounced. I suspect most of us did not touch CHK when it was crashing and false rumors of bankruptcy were surfacing. I wasn't a buyer of the common, but I was a seller of put options. But if you came to your own conclusion that CHK was not going bankrupt, it was time to load up.
An easier opportunity was small-cap Sanchez Energy. Again, I've written on the quality merits of Sanchez -- increasing production volumes, an untapped $400 million credit revolver and no bonds due until 2021. In other words, Sanchez is one of the last to fall under a prolonged period of low oil prices. Numerous other levered players would go bust first, perhaps slowly reducing supply.
To be intellectually honest and accurate, hindsight can be a distracting analytical exercise. But my bigger point is not that energy was a screaming buy last month. I believe pain in the oil patch is still to come on a massive scale and this rally could fizzle. But the investing reality is that odds are very high that superior investment returns can be generated when buying out-of-favor securities. CHK is not an obscure microcap, but in the past month the share price has tripled. Those types of returns will not occur when buying stocks that everyone is high on.
Make your own investment decisions, but do not ignore market prices. Market prices are the most valuable aspect of the day-to-day price quotations. On any given day, you can choose to buy, sell or do nothing. You do the first when prices are surrounded by negativity and the second when covered in optimism. Otherwise, you do nothing but wait for the right pitch.
