Published: August 16, 2010
There are some stocks you just
buy and hold forever.
These stocks represent businesses so fundamental to the
daily lives of so many people, they deserve to be at the core of
any serious long-term investor's portfolio. Buy them, never sell
them, let them ride for decades and reinvest the dividends along
Some investors might be skeptical of such an approach. It seems
uncharacteristic that a class of stocks could truly be held for
such a long period of time, regardless of circumstance.
But that's exactly what I'm saying. The very nature of a
"forever hold" is that, during a 30-50 year
nothing generally happens that these stocks can't overcome. And
there's only one group of stocks that sell a product used so
globally, that is so intrinsic to almost every person's life,
that is such a rank necessity for almost every business, that it
could withstand the test of time and generate serious long-term
gains for investors.
I'm talking of course, about oil stocks.
Companies like Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX),
ConocoPhillps (NYSE: COP) and yes, even British Petroleum
(NYSE: BP), are great long-term bets for investors. Smart
investors know that in good times and bad, through wartime and
peace, the world needs oil. It doesn't matter what the price of
oil is day-to-day or even year-to-year. As my colleague Andy
Obermuller recently noted, the easy oil is gone, but these big
oil players know how to find the rest. [Read:
5 Reasons Why
Exxon Mobil is a Buy] If you hold on to your big oil stocks, you
will eventually win.
Case in point: a friend of mine had a grandfather who recently
passed away and left him a hefty
inheritance. It consisted of a
stock portfolio with purchases between 1955 and 1972. Even
though grandfather had invested the same amount of money in a
basket of different stocks, the oil stocks had grown to the
point where they made up 53% of the portfolio.
Obviously, the grandfather never re-balanced his portfolio, but
I think the point is clear.
Most of the time, I delve deep into a company's financials
before making an investment. I analyze it to the nth degree. I
want to know everything about a business before I commit a penny
to it. But oil stocks like these are no-brainers. A quick glance
at their financials is just about all you need.
Big oil stocks generate hundreds of
billions of dollars in revenue every year. Their annual net
incomes are all in the mid-eleven figures. They push out $20-30
free cash flow each year. And if you take the cash
flow for any one of these companies, it would cover all of the
long-term debt for all of the big oil companies combined.
I know all about the big push for green energy. I know all about
Cash for Clunkers. I know all about how the world is allegedly
coming to an end from global warming.
None of it matters. The world runs on oil. It will continue to
run on oil for the foreseeable future.
In addition to selling what is practically the world's most
commodity, each of these stocks also offer steady,
growing dividends. Conoco yields 4.0%, Chevron pays 3.7%, Exxon
doles out 2.9%. These dividends provide, at a minimum, an
inflation hedge while awaiting
A quick word about BP. The company has wisely suspended its
dividend in order to redeploy that capital into the Gulf spill
cleanup efforts. The spill did not change the company's
business, however. The market took BP down, but I think we're
seeing that the company is going to be just fine in the long
run, and that this is probably a great opportunity for
significant capital gains.
Action To Take --> Do I
really mean buy Exxon Mobil, Chevron, ConocoPhillps and even
British Petroleum at any price, whether it be now or later?
Well, if your time horizon truly is decades, then it shouldn't
matter. I think these stocks are, quite frankly, great core
holdings for any long-term portfolio.
If you want to buy the most undervalued big oil stock relative
to its peers on an enterprise value/EBTIDA basis, I'd look at
Chevron. If you want a quick jump before settling in for
long-term gains, buy BP. The point is, buy them, forget about
them, and give your grandkids the gift of big profits.
-- Frederick Steier