At the beginning of June, I described the late Sir John Templeton's famous trade during the market meltdown in 1939 in which Templeton bought a large basket of stocks trading for $1 or less per share. That basket ended up tripling Templeton's money, even though several of his selections went bankrupt.
I suggested that perhaps a similar type basket bet in oil stocks may prove successful given the rapid selloff in energy stocks due to the crash in the price of oil. So, I offered some names that I thought were worthy of consideration for an energy basket bet. Below are the results so far. Keep in mind that Templeton kept his trade open for four years and my thinking was the same here. Over a period of years, buying badly-battered energy stocks could yield tremendous upside. So, the results below, after nearly 2 months, are relatively meaningless over the long term.
Bellatrix Exploration (BXE) , a Canadian energy company, is down about 10% during this time. This past week Bellatrix just announced a rather significant asset sale that is set to reduce debt substantially.
Templeton's original basket consisted of 104 securities and a third of them went bankrupt. That means the other two thirds did exceptionally well considering the investment tripled.
The key to this trade is the law of large numbers. While you may not need 100 oil companies, a basket has to be big enough to increase the probability of owning huge winners. I only suggested a few names, but the idea here is to have about 15 to 25 candidates.
I suspect an oil basket will have similar traits to Templeton's bet. Some energy companies will wipe out equity holders, while others will appreciate multifold. We will check in again at the end of the year to see how things are shaping up.