Have You Been Doing the Opposite? Warren Buffet says, "Now is the time to buy American." He is referring to the stock market and I suspect that quote has something to do with the market rally we're having today. Am I going to rush out and do just that? Not me. On the other hand, I didn't sell everything and I have raised a few dollars in cash by selling anticipated losers and accumulating, rather than reinvesting, dividends. As I mentioned in my last post, I did buy some more Anthracite Capital at around three bucks a share. It wasn't because I thought the company was going to turn around next week but because I thought the upside was infinitely higher than the downside.
We Should Listen To Mr. Buffet. When an investor as successful as Mr. Buffet speaks, you have to listen. Do you have to do what he says? No, its just another data point that you can use in conjunction with other data points to make sound financial decisions. When we have a crisis as serious as the one we're currently in, the key word is caution. I have been cautious in managing my portfolios and recommending that you do the same. If you have read my posts carefully during the past few weeks, you may have noted that I am becoming a bit more bullish in my approach. While I am not ready to "bet the farm" I find it difficult to resist some of the opportunities in this market.
What's Wrong With Marathon Oil? I've been watching this company for quite a while. Over the past few months, it has dropped from the mid $40's to to $28.5 per share. Why the drop? There are several possible reasons and anticipation of falling energy prices may be one of them. If you look at the share price trends vs the price of oil, it doesn't quite add up. While the price of oil has dropped to the 70's, it has simply returned to the levels of October, 2007. At that time, Marathon was $58.04. Obviously, Marathon share prices have dropped 50% from this level. So what were oil prices, the last time Marathon was in the current price range. In June of 2005, Marathon sold for $25.08 and the price of oil was $49.8 a barrel. Using that data point, you might conclude that investors predict a drop in oil prices to that level. If the current recession deepens, that is not impossible.
There Are Other Factors Influencing Share Prices. We certainly don't know them all but here are some reasons why Marathon appears to be a very good buy. 1. The dividend is 3.6%. This may not seem like a screaming return; however, you do get something close to a CD return while you wait for prices to get back to "normal." 2. It doesn't appear likely that the dividend will be cut in the future since they are only paying out 21% of their earnings. 3. The share price is slightly below book value. Although book value isn't an entirely accurate measure of intrinsic value, it is another data point. Historically, Marathon has sold for almost twice book value. Other oil companies are also priced at a higher multiple to book value. 3. Marathon is actively exploiting new energy sources. They have a stake in the Bakken field, one of the most promising new areas of domestic production and they are also participating in a new discovery of the coast of Angola. Given these factors, I have decided to invest some of my cash in Marathon oil at $28.7 per share. With a sufficient time frame, I think this investment will prove to be a good one, there is one more factor that allows me to hedge my bet.
Option Prices Are At Record Levels. When I made this investment on Tuesday, investors were willing to pay a dollar per share for the option to buy my stock at $30 three days later. This means that I would make $2.30 or 8% over a three day period. If the stock didn't rise to $30 per share, I could keep the dollar. That option expires today and Marathon is selling for around $27 per share and the dollar is mine to keep. What's my next move. Since I still think Marathon is a good company to own, Ill keep the stock and sell another call $30 call option, This option expires in November and can be sold for around two dollars a share. I'll continue to own this stock until I change my mind about the prospect for Marathon, or until I sell an option that is called. There is still plenty of risk involved in this investment but I am committed to keeping most of my funds in the market. If you are afraid to invest when the market is down, you will be stuck in a "buy high, sell low" strategy.
Don't Try This At Home. While this is an actual example of an investment I made, it is not a recommendation for you. In many cases, an investment like this one is totally inappropriate for a given financial situation. Never make an investment unless you have studied the risks involved and determined that you are willing to tolerate them.
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