*****Today is the last day of the second quarter. Mutual funds are no doubt buying the top performers to make their holdings look good. That helps explain today’s rebound. But what about yesterday’s declines?
Obviously, a quick 25% rally is going to have investors taking profits. This was especially apparent in the small-cap sector. It’s well known that small-cap stocks outperform when the stock market is recovering from a deep sell-off. Average gains for small caps digging out of the hole are 24%.
And we saw almost exactly that level of gain with Hovnanian Enterprises (NYSE:HOV).
Unfortunately, small-cap stocks bore the brunt of yesterday’s selling. In some cases, two weeks of gains were wiped out in one day. Hovnanian closed exactly at the price where I recommended it a week ago – $1.52.
It’s up modestly so far today and I have no problem holding it a bit longer.
*****On Friday, March 27, the NY Times ran an article about oil prices. Oil industry analysts are becoming concerned that low oil prices are causing oil companies to delay or even cancel planned projects to increase production capacity.
This article cites a report by oil consulting firm Cambridge Energy Research Associates that says the potential drop in production capacity is a "powerful and long-lasting aftershock following the oil price collapse."
From the article:
The report says about 7.6 million barrels a day of future supplies are "at risk" of being deferred or canceled, like heavy oil or deepwater projects, and which could bring total supplies to 101.4 million barrels a day by 2014. Last year, the group projected that capacity would rise to 109 million barrels a day by then.
Global oil demand is headed for its second consecutive drop this year. Over time, as populations grow, most experts expect oil consumption to rebound as emerging economies become richer. Any slowdown in investments now will translate into higher prices.
The lower that oil prices drop now and the longer they stay low, the greater the negative impact on future supply," John Lipsky, the first deputy managing director of the I.M.F., told an OPEC conference in Vienna this month. "In other words, today’s low prices could be setting the stage for another price run-up in the future."
*****The world is currently using approximately 84 million barrels of oil a day. It’s not hard to imagine the demand numbers getting dangerously close to supply in the not-so-distant future.
As we’ve seen in the past, an environment of tight supply and rising demand can create sharp moves higher for oil prices. And that holds true for oil stocks as well, as especially the small exploration companies that have large verified or potential oil reserves.
Small oil exploration stocks were devastated as the global economy slipped into recession and oil demand plummeted. Many are now trading at 2002 prices. I think this is an excellent opportunity for small-cap investors.
The most recent issue of SmallCapInvestor PRO profiles three such small oil exploration companies. One share of each of these stocks would cost you about $5.08. At their 52-week highs, these same shares totaled $42.91.
I’ve put the details of these three small oil exploration stocks into a special report called OIL SHOCK 2009: Strike it Rich with 3 Stocks Under $5. Click HERE for details on how you can get this special report.
That’s it for today. I’ll talk to you tomorrow.