Are Oil Stocks Worth A Second Look?

One of the oldest, and relatively effective, trading strategies on Wall Street is to sell on good news and buy on bad news. When it comes to bad news, boy, do oil stocks have more than their fair share. Thanks to the ongoing market share war between Saudi Arabia and US shale oil producers, Saudi Arabia has used its dominant voting power in OPEC to maintain the cartel’s production levels. This has resulted in crude oil’s over 40% price plunge. It appears Saudi Arabia won’t be changing its mind soon and analysts expect global petroleum prices to continue on a downward trend. Of course, this has soured market sentiment on oil stocks. We’re not just talking about actual refiners of oil but also oil services and oil-related stocks.

Given the beating petroleum stocks have taken, are they now worth a second look? Well, it might still be too early. Remember, the bloodbath in oil prices are still fairly recent. They haven’t figured yet in official earnings reports. A lot of the discounting we’ve seen so far are anticipatory moves by traders who expect petroleum companies’ earnings to take a hit. These stocks’ current prices may not be near the bottom yet because they haven’t released earnings reports that reflect oil’s current decline.

If you are itching to use the old ‘buy on bad news’ trading strategy, it might be  good idea to wait a bit. Don’t just buy when the anticipated bad earnings come out. You might want to get in if there are back to back quarters of bad earnings performance. Considering how the market often trades based on a roller coaster mood swing, expect downward pressures to really press on otherwise solid companies which simply found themselves on the negative end of market sentiment. When irrational negativity has kicked in, that would be a great time to buy. Still, you need to buy only oil companies with healthy cash positions, little to no debt, and solid asset portfolios.