If Donald Trump and his son were men of their word, I'd be about to inherit all of Donald Trump's fortune when he passes. You see, I once bet Donald Trump Jr. that oil would see the $30s before it would see $150s as I hosted a nationally televised two-hour block party on Wall Street in July 2008. Oil was at $130 on its way to $147. The bet? Each of our respective inheritances against the other's.
Two months later, oil was at $33. Donald Trump Jr. never came back on my show! For the record, though, he was a gentleman and his sister was the first guest on my TV show and she was smart, friendly and engaging.
For the last 20 years or so, I've mostly steered clear of oil and energy stocks because the sector, as I've explained on Real Money many times in years past, is just too cyclical to invest in for the long run. Every 10 to 15 years, energy prices rally big and every energy analyst starts talking about "peak 0il" or whatever justification they have to explain how the cycle is somehow going to play out differently this time just as the cycle tops out. And then oil crashes as production skyrockets.
Eventually, the selloff in energy gets overdone on the downside, production gets gradually reduced, consumption of energy rises over time with the broader economy and, voila, the cycle bottoms out.
I grew up in a tourist town in southeastern New Mexico and I've seen this energy cycle play out probably five or six times. This time will be no different.
Oil, natural gas, coal and other old-world energy sources are cyclical and always have been and probably always will be. The one part of energy that is different today is the fact that renewable energy sources, namely solar and wind, are not as dependent on the broader energy cycle and are getting cheap enough to truly impact demand for the traditional old-world energy sources. Solar in particular is driving this secular (rather than cyclical) change in energy production prices.
I was a longtime bear and short on the alternative energy sector before I "flipped it" and turned into a bull/long, covering my shorts and investing in First Solar (FSLR) a few years ago when a wave of bankruptcies in solar/alt-energy hit. I still own my First Solar stock and plan to own it for many years to come regardless of what happens to the broader energy sector and oil/natural gas prices.
I like being a contrarian, though, and with the collapse in energy prices and energy-related stocks, I've been spending a lot of time looking at names like Freeport McMoran (FCX) and others in the traditional energy and commodities sector. And I see two major problems for them near term that keep me from buying any of them. First, natural gas and oil need to rally 30% to 50% before the major energy stocks would actually benefit much. And second, their balance sheets are mostly wrecked with huge debt and little cash.
FCX, for example, has $18 billion debt and less than $1 billion in cash. Its balance sheet leaves very little wiggle room for any financial downturn at all and the banks will cut off the cash. Chesapeake (CHK) has $11 billion in debt, making it an ugly balance sheet. One of the most dramatic drops in the commodity sector is probably Peabody Energy (BTU).
Why these companies didn't do some secondaries back when their stocks were in rally mode, up 500% from their lows and worth tens of billions of dollars, is beyond me. But it's too late now. FCX filed to do a secondary with its stock down 90%. I guess that's better late than never. But all this reminds me of JDS Uniphase (JDSU), which, like BTU, is down 99% from its highs. Why don't these companies ever do 10% secondaries when they are worth tens of billions of dollars so that they give themselves a few-billion-dollar safety net? BTU was worth $20 billion! It's now worth $372 million. It could have raised $2 billion doing a secondary when times were good.
Debt and dependence on a higher commodity price in a down cycle are not a good idea and not a good risk/reward. For the last six months, I've told all my subscribers and followers on TradingWithCody.com and Scutify to just stay away from energy. You don't need to nail the bottom in that cycle, which could very well take several more years to play out. As I've been saying for my entire career on Wall Street: Sticking with secular growth in revolutionary technologies is a much easier game to play than trying to nail cyclical tops and bottoms.
You might have read me explaining this logic before:
"It's not that I believe Phelps Dodge is a short. I'm sure not going to guess when the dynamics of the commodity boom will change. But looking back in three years, I sure don't think we're going to look back at May 3, 2006, as a great time to buy Phelps Dodge. I do believe we might look back at May 3, 2006, as a great time to buy Microsoft (MSFT). And that logic, more than anything else, is why I remain so bullish on tech stocks."
Indeed, owning FCX (which acquired Phelps Dodge) since May 2006 would have left you down 65%. Owning MSFT since May 2006 is a 97% gainer. Owning Google (GOOGL) since May 2006 is a 250% gainer. And owning Apple (AAPL) since May 2006 is a 1,000% gainer. I still own the Google and Apple stock that I owned back in 2006. I plan on holding them for many more years to come. Forget oil, natural gas and coal and their related stocks. Stick with tech and revolution investing. (Apple and Google are part of TheStreet's Action Alerts PLUS portfolio.)
Eventually, perhaps when a spate of bankruptcies finally hits the energy sector, there might be a clear bottom being put into the traditional energy sector. Not that you have to nail that bottom either, though. Let it play out. Don't be a hero with your money.