The late Sir John Templeton was arguably one of the 20th century's most underrated investors, with a sound investment approach and incredible long-term track record. Let's look at a trade that Templeton made in 1939 that's applicable to the energy sector today.
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.
I believe that today's investors can make just such a trade in the oil-and-gas sector. After all, energy stocks are trading for a fraction of what they used to given the pounding that the segment has taken.
Now, some oil-and-gas firms will likely either go bust or face slow, painful declines because of the industry's prodigious use of leverage. But others will probably see their share prices rise to several multiples of current levels.
Of course, not all oil-company stocks trade below a $1 a share, and I'm not going to recommend a basket of names for you to invest in. Instead, I'd suggest picking up a copy of the Value Line Investment Survey or simply using the Internet to research the hundreds of oil-and-gas companies that trade publicly.
Look at the balance sheets of firms that look interesting -- perhaps those with high insider ownership, a quality management team, a highly regarded investor as a shareholder or another variable or two that stand out. A few names to consider include Bellatrix Exploration (BXE), Chesapeake Energy (CHK), Comstock Resources (CRK), EXCO Resources (XCO), Kosmos Energy (KOS), and Memorial Production Partners (MEMP).
The key is to to remember that you're not trying to pick the one winner, but making a bet on the likelihood of a general uptrend. After all, Templeton bet in 1939 that the overall market and economy would improve.
Similarly, buying a basket of stocks in today's beaten-down oil-and-gas sector is a bet that the overall energy industry will stabilize, with weaker players driven out of business and the more-efficient producers prospering in a less-competitive environment.
