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  1. Home
  2. / Investing
  3. / Energy

It's Time to Play Defense

Metals, energy stocks may offer best protection since they've already taken big hits.
By ROGER ARNOLD Sep 17, 2015 | 02:03 PM EDT
Stocks quotes in this article: GDX, NEM, FCX, SDRL, SDLP, RIG, ESV, NE

Regardless of what the Fed's decision on rates is today, the process of attempting to normalize monetary policy and the interest rate environment will begin soon.

The totality of the official communications by Vice Chairman Stanley Fischer makes this clear and, most importantly, indicates that he is of the opinion that not only does monetary policy need to become more actively involved in steering the markets and economy to the environment the Fed deems sustainable, but in doing so, monetary policy can be used to lead or even force compliance to the Fed's desires by the capital markets and consumers.

This is a radical departure from the norm and the attempt to do so is fraught with implications that can not only not be anticipated but have never been considered or studied by academics.

This is not to imply that Fischer is a maverick or rogue central banker. He was brought in to the Fed to do exactly what he's doing, and it is most likely his goals for monetary policy will be supported by Chair Janet Yellen at some point.

The importance of this for investors cannot be overstated.

If the Fed attempts to force the markets and economy to adjust to a higher interest regime against the will of investors and consumers, rather than capitulating to the Fed's wishes they may instead do the opposite.

Whether or not that occurs, though, the prudent stance is to position capital in sectors that have a lesser downside potential in the event of a negative reaction by investors and consumers, and a greater upside potential in the event the markets and economy conform positively to the regime change.

The best way of accomplishing this now is to take positions in sectors that have already suffered greatly from the growing global deflationary pressures. Broadly speaking, that's in the commodities space, and within that space the most attractive are metals and energy.

The decline in gold prices over the past five years has helped to drive the gold miners to their lowest level relative to gold prices in 30 years.

I last wrote about gold just four months ago when its long-term real rate of appreciation declined to its very long-term rate of 0%.

That should have signaled to the markets that the vast majority of the correction in prices for the metal and the miners that's occurred over the past five years was concluded and the prices for the miners should have stabilized.

Instead, in the past four months, they've declined even more aggressively with Market Vectors Gold Miners ETF (GDX) down 33%, Newmont Mining (NEM) down 39, and Freeport-McMoRan (FCX) down a whopping 48%.

All three are also down by about 75% in the past five years.

Although gold prices may decline further and break the $1,000 level before reversing, the current prices for the miners represent long-term buying opportunities that are as good as it gets.

In the energy space, the decline in oil prices of the past year has devastated the oil production infrastructure sector.

In the past year, SeaDrill Limited (SDRL) has lost 73% of its value and is trading about where it bottomed in the post-Lehman-crisis crash in equities. The company now trades at a price to earnings ratio of about 3.5 and is profitable.

Seadrill Partners (SDLP) is down 69% in the past year and at its lowest level since going public in 2012. It also trades at a P/E of about 3.5 and pays a dividend of 22.3%. Although the dividend will almost surely be cut soon, and perhaps completely, the company is profitable and has the best financials in the sector.

Transocean (RIG) has lost 53% in the past year. Its immediate post-Lehman-crisis low was about $41. It's now $15.81; a 20-year low. It is losing money but it's the largest company in the sector, with a labor force of about 14,000, which is twice as many employees as the second-largest. They have room to cut overhead.

Ensco (ESV) has lost 62% in the past year and is also trading below its immediate post-Lehman low and a 15-year low. It's losing money but also has a large labor force at about 8,500 and thus also has the ability to cut expenses.

Noble (NE) is down 46% in the past year, is also below its post-Lehman low and also at a 15-year low. It is posting losses of $0.59 per share but also paying a dividend of $1.50.

All of these stocks are well positioned for long-term appreciation regardless of what the Fed does or how the markets broadly respond.

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At the time of publication, Arnold had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Energy

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