- The Washington Times - Tuesday, September 6, 2005

Q: Oil company stocks have done so well this year. Are they still a good investment?

A: With oil prices recently topping $67 per barrel and the stock market treading water, it may seem natural to hedge against the rising cost of oil by buying oil company stocks.

The sector’s performance would seem to back that up. The AMEX Oil Index, a basket of 12 oil industry stocks, has surged 63 percent in the past year. The top oil companies have also seen standout results — Dow Jones Industrial Exxon Mobil Corp. has risen 30 percent, Chevron Corp. is up 27.5 percent and ConocoPhilips has gained nearly 70 percent in the past 52 weeks.

These are great returns, especially when one considers that the Standard & Poor’s 500 has risen 11.9 percent in the same 52-week span starting last August.

In the same period, the price of oil has skyrocketed 32 percent. Companies, especially retailers such as Wal-Mart Stores Inc., are starting to warn shareholders that the high price of gasoline is making consumers spend more at the pump and less in the stores.

Yet although investing in the energy sector might seem like a good idea now, it was a much better idea a year ago. It’s an old Wall Street axiom — by the time the little guy hears about a trend, it’s over. Investors who purchased technology shares in 2000 and 2001 remember that lesson quite well.

“Trees don’t grow to the sky. Sectors don’t outperform forever,” said Jack Ablin, chief investment officer at Harris Private Bank. “At some point, oil and energy stocks are going to come back in line with the rest of the market.”

Although predicting the direction of crude oil itself can be “two steps away from alchemy,” Mr. Ablin said, the future of oil and energy stocks falls into two camps, neither of which bodes well for continued growth.

If oil prices continue rising and stay high in the long term, energy companies might continue to outperform the market — but the market itself will fall as the economy struggles under the weight of high fuel costs. And even oil companies cannot withstand a generally bearish market, so the stocks will likely fall from their current heights.

And if oil prices moderate and fall, then oil company stocks will likely fall with them even as the rest of the stock market recovers.

“Energy stocks have backed themselves into a corner, and it’s hard to foresee a rosy scenario,” Mr. Ablin said. “I think they can hold on to most of their gains of the last year or so, but there’s not much room on the upside.”

Those who already own oil company stocks can consider themselves lucky having experienced much of the jump that those stocks are likely to enjoy. Although global demand will continue to rise for the foreseeable future, oil prices have been highly volatile, and oil company stocks can still fall.

Stock strategists say anyone considering oil companies at this point is taking a risk. And investors should remember another old Wall Street axiom — it’s better to buy stock in companies you believe in and hold for the long term, than attempt to play the market’s fickle trends.

ASSOCIATED PRESS

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