Buy when there is blood on the floor . . .
Don't be in any rush to sell when markets recover
In a recent Twitter space hosted by the Canadian Oil Mafia (#COM) I was asked how I decided when to buy and when to sell energy stocks. My answer - buy when it is clear the market is over reacting to bad news and there is blood on the floor . . . and keep your holdings for the long term as the market plays out.
The March 2020 news that there was a global pandemic saw a “flight to safety” as panic selling is often called. There is little “safe” about panic selling. My investment strategy was simply to buy companies I follow in small bites at ludicrous prices by any measure. Here is a listing of my March 2020 and April purchases in one of my smaller investment accounts, this one at CIBC Investors’ Edge:
Three of my holdings were disposed of through takeovers by third parties - Interpipeline taken over by Brookfield; Premier Gold by Equinox; and, Seven Generations by ARC Resources (ARX.TO). I retained the balance and will keep them for the long term. Based on my original cost, they today yield 25% and I expect that yield to improve as dividend rates are increased. For example, Birchcliff has stated publicly that it expects to begin paying an $0.80 annual dividend in 2023.
This is a complete list of the stock purchases I made in that account in March and April of 2020. As investors headed for the exit door, I met them on my way in. Based on my own financial models of each holding, I believe the underlying value remains far higher than the market has priced these shares. In particular:
I value Advantage Energy at $15 per share
I value Athabasca Oil at $3.00 per share
I value Baytex at $10 per share
I value Birchcliff at $15 per share
I value Crescent Point at $12 per share
I value MEG Energy at $20 per share
I value ARX Resources at $20 per share
I value WCP at $15 per share.
My valuations are based on the assumption that oil prices remain above $60 a barrel (WTI) and natural gas prices remain above $3.50 per gigajoule through 2023. Commodity prices tend to be log-normally distributed with reversion to the mean and my estimates reflect my conclusion that there is at least a 60% chance that the oil and gas prices I have assumed persist through 2023. For math geeks here is a link to an article setting out the distribution of commodity prices based on empirical data over a decade as described in the article. I am sure there are readers with greater competence in mathematics than mine so I am happy to be corrected.
Remember the old adage “Be fearful when others are bold and bold when others are fearful”. I expect the likely recession the market seems to be discounting to present some buying opportunities, which should be enjoyed like fine wines - in small sips.