Behind the Headlines
THIS MONTH: Oil and Dell. Both down in the dumps.
(MONEY Magazine) – NOT A BUY
Playing Slick with Oil Could Be a Hazardous Maneuver
SO JUST HOW LOW CAN OIL GO? Since July, oil prices have fallen more than 20% from their peak of $78 a barrel. Prices could dip even lower in the coming months, analysts say, but over the next decade or longer, they're likely to keep rising as long as the world economy continues to expand.
So it may seem that there's a great buying opportunity right around the corner and that you should be prepared to move spare cash into energy stocks.
Don't do it. Historically, following a spike, oil prices don't simply retreat to reasonable levels. They often overshoot and fall far more than even seems possible.
Just look back a few decades and adjust for inflation. Following the 1970s crisis, oil peaked briefly in 1981 at $77 a barrel (in today's dollars).
Over the next few years, oil fell to around $50. But that wasn't the end of the decline. Oil traded for less than $30 a barrel through most of the late 1980s and the '90s--and the price even dropped below $20 a couple of times. So avoid making a big speculative bet on oil now.
Of course, there's no guarantee that prices will fall so far this time around or that the current decline will even last very long. And it still makes sense to include energy-related stocks in a diversified portfolio. If you need one, consider a global oil-service company such as Schlumberger (ticker symbol: SLB).
That stock is trading at less than 16 times estimated 2007 earnings, much closer than usual to the market's average. And you can probably count on oil companies to keep drilling new wells.
Dell: Dead or Deal?
A resurgent Hewlett-Packard, combustible laptop batteries and an accounting probe have sent shares of Dell (DELL) down 25% this year. And that apparently spells opportunity for some value managers.
Though Dell was already the Longleaf Partners fund's (LLPFX) largest holding, the fund bought more in the second quarter. (Funds won't report their third-quarter moves for several weeks.) Managers Mason Hawkins and Staley Cates said in a shareholder letter that they considered the stock undervalued, citing Dell's strong overseas business and aggressive share-buyback program. The top-performing Dodge & Cox Stock (DODGX) fund and T. Rowe Price Equity Income (PRFDX), a MONEY 65 fund, were new buyers of the stock.
After they peaked in 1981, oil prices fell much further than analysts had expected.
Oil prices adjusted for inflation (annual avg.)
$78 07/06 PEAK
SOURCES: U.S. Department of Energy, U.S. Department of Labor.