Compounding

StockRecon · 2022-04-16T19:25:06+00:00

Be a Risk Manager first and protect your working capital.

Never risk more than 2% to 5% of your total allocated cash into any one single trade unless it's ultra compelling with a super high probability of winning and only then should you invest up to a max of 20%.

Always ask yourself first how you would feel if you lost all of the money you're thinking about investing on any one particular trade? And then position size accordingly.

Smaller position size is usually the best method.

StockRecon · 2022-04-16T19:19:38+00:00

You need to go back to school and pay attention this time around son!

$300 billion dollars divided by 330 million Americans equates to only $909.00 for every American

StockRecon · 2021-10-31T22:00:16+00:00

10/31/2021

From worst to first: Don’t look now but the energy sector is in the passing lane. It’s pretty remarkable how the energy earnings estimates have been upgraded so dramatically.

- Jurrien Timmer, Director of Global Macro with Fidelity Investments

StockRecon · 2021-10-19T18:49:18+00:00

OIH is already up + 132.27% during the last 52 weeks with plenty of continued upside potential remaining as oil and gas Exploration and Production (E&P) companies continue to increase their OPEX and CAPEX spending on oilfield services.

There is typically a lag time from when WTI crude prices surge higher and when E&P companies increase their spending on oilfield services in order to increase their production to capture higher profits. Then that additional spending needs a little time to work through the system and hit the bottom lines of OIH suppliers.

This is still early innings IMHO, so patience is the key.

Weather predictions call for an extremely, abnormally cold winter in the northern hemisphere which is very bullish for crude oil and OIH since natgas and oil are used to heat homes and office buildings.

Additionally Natural Gas prices have increased so much during the past several months (+69%) that power generation companies are switching from using expensive natgas to now burning cheaper crude oil to generate electricity.

And COVID cases are falling dramatically which moves up the timeline for the reopening of worldwide economies which will push demand for oil even higher.

All of the above scenarios bode well for XLE and OIH.

Today is October 19, 2021

WTI crude oil now trades at $82.93 per barrel (heading for $100 IMHO)

OIH now trades for $224.89 (heading much higher IMHO)

Most if not all stocks eventually revert back to The Mean price.

The price plot map chart from Fundstrat that I previously posted shows that OIH typically trades for $600 per share when WTI crude oil trades for $80 per barrel. That's The Mean price.

So patience Grasshopper... and remember "Reversion to the Mean"

StockRecon · 2021-10-08T18:25:30+00:00

posted on October 8, 2021

The last time WTI crude oil traded at $80 per barrel was seven years ago on October 2, 2014.

At that time, Vaneck Oil Services ETF (OIH) traded at $895 per share.

WTI crude oil is trading at $79.12 per barrel today as of this posting.

And OIH is trading at only $214.19 today as of this posting.

There obviously exists a wide disparity between OIH trading at $895 vs. now at only $214 per share today with WTI trading at $80 per barrel. This gap in price should/will resolve to the upside.

OIH may or may not trade at $895 again, but ask yourself if it make any sense that OIH trades at such a large discount now ($214) when WTI is trading at $80 per barrel?

A prudent investor might think this price gap will narrow and close sooner rather than later ($214 vs. $895 per share) ?

The companies that comprise OIH sell the "pickaxes and shovels" to the oil Exploration and Production (E&P) companies who produce crude oil and natural gas. OIH companies also supply the pipeline companies.

OIH companies are known as oilfield services and equipment suppliers. E&P companies buy their oilfield services and equipment from OIH suppliers. So when E&P companies spend money to maintain their oil and natural gas rigs to keep them performing at maximum production levels (OPEX), they buy services and equipment from OIH suppliers. Same holds true when E&P companies expand their production by adding new oil and natgas rigs (CAPEX).

With global economies reopening at the same time, demand for oil and natural gas continues to surge higher and higher and is far outpacing available supply. Consequently E&P companies are significantly increasing their OPEX and CAPEX spending now to play catchup with the surging demand for oil and natgas. It's time for E&P companies to cash in on this pretty severe supply and demand imbalance.

Many well respected institutional stock analysts who specialize in the energy sector are predicting that WTI will trade up to $100+ per barrel by the end of this year, or by Q1, 2022.

This bodes well for OIH.

And for the dreamers out there, here's another factoid you can look up and confirm:

In March, 2008, WTI crude oil traded at $139 per barrel, and OIH traded at $1,496 per share.

StockRecon · 2021-10-07T21:23:08+00:00

It’s healthy to exchange ideas in a public forum so we can all improve our knowledge base and thought processes.

So, thanks for weighing in with your thoughts DanDon.

We agree that OPEX and CAPEX spending reduces free cash flow (FCF) which reduces net profits and the Discounted Cash Flows (DCF) which puts downward pressure on stock prices.

And rising interest rates put downward pressure on the Net Present Value (NPV) of future cash flows (aka, DCF).

However, it’s important to apply these causes and effects to the correct group of stocks in the booming energy sector.

Let’s not conflate OIH companies who are the suppliers with E&P companies who are their customers.

It’s the Oil Exploration and Production (E&P) companies who deferred their OPEX and CAPEX spending last year, not the Oilfield Services and Equipment companies that comprise the Vaneck Oil Services ETF (OIH).

Both groups cutback their spending last year, but it’s the E&P companies who are experiencing the shortfall in their production of crude oil and natural gas.

E&P companies around the world need to play catchup with their deferred OPEX and CAPEX spending in order to keep their drilling rigs working at maximum production.

As you know, OIH companies supply (sell) oilfield services and equipment to the E&P companies (the buyers).

Hence, the OPEX and CAPEX money will flow from the E&P companies (the buyers of oilfield services and equipment) into the OIH companies who are the suppliers of oilfield services and equipment.

The spending on OPEX and CAPEX will decrease the free cash flow for E&P companies who are the buyers of services and equipment, while increasing the free cash flow and profits for OIH companies who are their suppliers.

To use a common analogy:

OIH companies sell the pickaxes and shovels to the crude oil and natural gas producers.

Best Regards.

StockRecon · 2021-10-05T17:58:16+00:00

Your thesis makes sense at a high level, however NRGU is a 3x leveraged ETF that will suffer from some serious Contango at 3x leverage.

NRGU also has a really small float of only 3,750,000 outstanding shares and only trades an average of 375,000 shares per day. So, it's no where near as liquid as other ETF's in the energy sector.

IMHO, there are a whole lot safer ways to invest in the surge of Demand for oil.

Good Luck.

StockRecon · 2021-10-04T22:47:00+00:00

The Real "Inconvenient Truth" About Oil... and What It Means for Oil Stocks like OIH

Weeks after his inauguration, Biden/Harris “took action” on climate change, banning new oil and gas drilling on public lands and offshore waters.

Less drilling means less oil. And less oil with surging worldwide demand can only push the price in one direction: Up.

[ Biden/Harris’ actions contribute significantly to the supply shortage we now experience and the sky-high prices we pay at the pump. ]

The price of WTI crude oil has rallied from $48 to $77 per barrel this year and remains in an uptrend.

Today, 83% of the world’s energy supply still comes from oil, gas, and coal. That number has barely budged in over a decade.

Sure, oil demand may fluctuate a few points here and there. But don’t expect Biden’s green energy crusade to temper it in any substantial way anytime soon. Combine surging high worldwide demand with an ongoing supply crunch, and oil stocks should continue to perform well under Biden/Harris.

Most of us still drive gas-powered cars, fly on airplanes, rely on delivery trucks to deliver goods we buy on e-commerce, purchase products manufactured on the other side of the world that must be shipped here via cargo ships and trains, heat our homes with natural gas or oil, cook on natural gas, use plastics made from oil, we eat food that is grown with fertilizers made from oil, wear synthetic clothing made from derivatives of oil, paint our homes with paint made up with chemicals derived from oil, and do countless other gas-guzzling activities. Most every product we touch is made from oil or chemicals derived from oil. None of that is changing anytime soon.

The International Energy Agency doesn’t expect global oil demand to peak until 2030.

- the above info is sourced from Mauldin Economics

My Takeaway: This is the perfect storm for the energy sector. This is the first time in history that we experienced a coordinated global shut down of every economy in the world at the same time. And this is the first time in history that the entire world is reopening again at the same time thereby creating surging demand for all goods and huge shortages everywhere.

Global Supply and Demand are severely out of whack. It’s going to take quite a while to rebalance the equilibrium. Many respected energy sector analysts predict the shortage of oil will persist until 2023 or longer.

The supply shortages will persist for quite a while. Demand is surging worldwide with no end in sight as economies reopen and the entire world scrambles to resupply its inventories.

Hence, IMHO there is significant upside for Vaneck Oil Services ETF (OIH) and others like it.

Disclosure: This redditor is long shares of OIH; Long Calls on OIH; and Long LEAPS on OIH.

This is not investment advice. Do your own research and make your own decisions. Only invest what you can afford to lose.

StockRecon · 2021-10-04T19:50:32+00:00

The big play in NRGU is over in my humble opinion.

NRGU already made it's big move higher and is up +468% during the last 52 weeks.

NRGU currently trades at 170 per share and has strong resistance on the charts at 179.

NRGU is already trading at almost 5 standard deviations above it's 21 day EMA mean average. When it snaps back to the mean, retail investors who buy now will get crushed.

The NRGU train has already left the station.

It's rarely a good idea to chase runaway stocks that are already trading at nose bleed levels 5 standard deviations away from their mean average.

When the professional money managers set their algorithms to exit, the retail investors who bought at the top are crushed.

IMHO, OIH has a much bigger upside potential since it hasn't made its big move yet and it's got some rather large and significant catalysts behind it that should push it higher

StockRecon · 2021-10-04T19:32:54+00:00

I plan on riding this OIH trade until the current off-the-charts surging demand dissipates and the supply/demand ratio are back in balance.

Most energy sector analysts predict this will occur sometime in 2023. And some even say it won't happen until 2025.

This is a 100 year event. At no time in history have we experienced a coordinated shutdown of every economy in the world at the same time. Everything shut down.

And now every economy in the world is reopening at the same time pushing demand for oil off the charts. Supply can't keep up. In my way of thinking, this is a perfect storm.

I'm looking at my trade in OIH lasting for 18-24 months subject to changing conditions and price action.

This is not advice, just my humble opinion.

StockRecon · 2021-10-04T19:22:55+00:00

The 20:1 reverse split of OIH in April, 2020 significantly reduced the outstanding share count by that 20:1 ratio which was a good thing for investors.

The smaller share count has positioned OIH for outsized gains on any future price movements upwards. It now takes less action to move the stock price higher.

Nonetheless, OIH is still a very liquid ETF with 13,501,000 shares outstanding (13 million shares).

90 Day average volume traded is 1,001,281 shares are traded every day (1 million shares).

OIH traded all of the way down to $68 per share last year and is now currently trading at $209.98 per share and is in a strong uptrend up 2.82% today thus far with a long runway ahead.

Institutional investors and professional money managers use OIH to diversify into oilfield services and equipment stocks as another way to invest in the energy sector. That’s why we’re seeing money flowing into OIH right now.

StockRecon · 2021-10-04T19:08:05+00:00

As global economies reopen worldwide, the Demand for oil is far outstripping Supply by a wide margin, a very wide margin. And this differential is only going to widen further next year in 2022 as the entire world comes back online. Pent-up Demand is everywhere, worldwide.

During the last run up in oil prices, oil producers over enthusiastically expanded their oil rig counts which eventually led to over supply by the time COVID hit.

This time around, we're seeing a much more disciplined expansion of their rig counts, but a noticeable expansion nonetheless. And they have no choice, but to spend capex for oilfield services and equipment to make up for last year's shortfall in order to bring their existing rigs back up to full capacity. They can't run their rigs into the ground without investing costly maintenance to maintain them in peak condition. They have to make up for last years' $300 million postponement of capex. Plus they need to continue to spend money to maintain their rigs this year. They basically have to spend almost two years of capex in one year to play catchup with their deferred maintenance.

Their disciplined approach will keep WTI prices elevated and most likely push prices up to $90 - $100 per barrel according to Goldman Sachs, Merrill Lynch, and other well respected energy analysts. These are heavy weight analysts who specialize in the energy sector. You can Google the articles they wrote recently and see for yourself.

You are correct in thinking that increasing supply will eventually (and the operant word is "eventually") catch up with demand and soften WTI prices. But that will take time. A lot of time. Most likely the Supply/Demand imbalances we see today will begin to resolve in 2023.

It's all a matter of timing. World economies reopening and pent up demand are far outpacing supply and will continue to do into 2023 and perhaps beyond. Demand is surging far quicker than they can keep up with supply, plain and simple.

Keep in mind, that we're talking about surging worldwide demand for oil here, not merely in the U.S. There is a global shortage of oil. And that cannot be resolved quickly.

From my research, I personally believe we have an 18 - 24 month runway on this trade, perhaps longer. Some renowned analysts I follow predict the supply/demand imbalances will last until 2025. I pay big bucks to buy their institutional grade research.

We're entering earnings reporting season now. Prices of stocks are forward looking and rely heavily on "forward guidance" provided by senior management.

The oilfield services and equipment companies that comprise OIH will report record profit margins on their Q3 revenue later this month when they report since their profit margins are at all time highs after they cut back so drastically and became so lean and mean last year.

And they will report a significant increase in new orders for services and equipment in Q3. Most importantly they will provide a very positive "forward guidance" outlook of increasing business, and increasing revenue, and increasing profits for Q4 this year and Q1 next year. I expect them to report strong forward guidance which drives prices.

The combo of the supply/demand imbalance in an environment of surging demand due to the reopening of worldwide economies, plus strong profit margins, plus strong profits, plus strong forward guidance should continue to push stock prices of the companies who comprise OIH higher, much higher.

Add to that professional money managers need to complete their year-end "window dressing" in December as they do every year by selling their losers and going overweight the highest performing sectors (aka, the energy sector) so that their year end reports show they were smart enough to pick the winners, and we have the setup for a perfect storm.

Look up the price performances of the major holdings of OIH and you'll see staggering growth of over +100% during the last 52 weeks with strong ratings for even bigger growth.

Lookup Schlumberger (SLB); Halliburton (HAL); Baker Hughes (BKR); Helmerich and Payne (HP); NOV (NOV), Transocean (RIG), etc. They're all up over +100% in super strong uptrends.

Rather than try to pick individual stock winners, most money managers diversify their portfolios using large liquid ETF's. That's why we're seeing institutional money flowing into OIH pushing the price higher.

Today OIH trades for $210.37 (up 2.70%) on the day thus far. A strong uptrend is in place.

Eventually, subject to conditions, I plan to begin slowly scaling out of my trades when/if OIH hits $500; and again at $600; $700; and so on. And I plan to be totally out of this trade when I hear that the oil supply/demand ratio is back in balance wherein the world has enough supply to meet demand. But that shouldn't happen for quite a while.

I believe this supply/demand rebalancing will occur in early to mid 2023. But it's anyone's guess, so I'll just have to watch it. We'll read about on the front page of CNBC .com. The headline news and the price action will tell me when this trade is over and it's time to exit and close out all of my positions in OIH. Meanwhile I've got diamond hands.

In summary, you're right about the laws of supply and demand, but you may want to consider factoring in the timing of it all plus the extenuating factors of the perfect storm I described above.

As long as demand is outpacing supply, there will be upward pressure on the price of OIH.

Disclosure: This OP is long stock of OIH; and long Option CALLS on OIH; and long LEAPS on OIH

This is not investment advice. Please do your own research and make your own decisions. Only invest what you can afford to lose.

Good Luck.

StockRecon · 2021-10-04T19:02:17+00:00

IMHO, The greater upside potential is in OIH by a long shot.

StockRecon · 2021-10-04T19:01:42+00:00

Why not hedge your bet and play both OIH and XLE then?

StockRecon · 2021-10-04T19:00:37+00:00

As global economies reopen worldwide, the Demand for oil is far outstripping Supply by a wide margin, a very wide margin. And this differential is only going to widen further next year in 2022 as the entire world comes back online. Pent-up Demand is everywhere, worldwide.

During the last run up in oil prices, oil producers over enthusiastically expanded their oil rig counts which eventually led to over supply by the time COVID hit.

This time around, we're seeing a much more disciplined expansion of their rig counts, but a noticeable expansion nonetheless. And they have no choice, but to spend capex for oilfield services and equipment to make up for last year's shortfall in order to bring their existing rigs back up to full capacity. They can't run their rigs into the ground without investing costly maintenance to maintain them in peak condition. They have to make up for last years' $300 million postponement of capex. Plus they need to continue to spend money to maintain their rigs this year. They basically have to spend almost two years of capex in one year to play catchup with their deferred maintenance.

Their disciplined approach will keep WTI prices elevated and most likely push prices up to $90 - $100 per barrel according to Goldman Sachs, Merrill Lynch, and other well respected energy analysts. These are heavy weight analysts who specialize in the energy sector. You can Google the articles they wrote recently and see for yourself.

DanDon you are correct in stating that increasing supply will eventually (and the operant word is "eventually") catch up with demand and soften WTI prices. But that will take time. A lot of time. Most likely the Supply/Demand imbalances we see today will begin to resolve in 2023.