In his May market commentary Bill Gross of PIMCO compared the risk of investing today to a Sweeney Todd haircut. Losing one’s head in the market isn’t a very promising outlook, but you can’t collect dividends if you aren’t invested. Gross suggests that investors “gradually reduce risk positions in 2013.” Here are some ways to do that with a perpetually in-demand commodity.
A Bubble
Bill Gross’ May commentary is as flowery as usual. In the end, he is suggesting that the best way for investors to avoid losing money in the current market is to simply get out. Why? He believes that we are in a “central-bank-generated bubble.” The market hovering near all time highs is just one sign of the froth.
For a more specific example, take a look at Tesla Motors Inc (NASDAQ:TSLA)’ recent price advance. To be sure, the company’s move from red ink to black ink could be the start of a long run of success. However, based on the stock’s recent price in the $90 a share range, it is wildly overvalued compared to its automotive brethren.
High Flying
Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) both trade with price to earnings multiples in the high single digits. Tesla Motors Inc (NASDAQ:TSLA) lost almost $2.70 a share over the last year, so its trailing P/E is still meaningless. If it were to match the P/E range of Ford and GM, it would need to earn around $8 a share over the next 12 months (that would be its forward P/E). It earned $0.10 a share in the first quarter, so $8 is likely a long way off.
Gross admits that sitting on cash isn’t the best way to make money and, thus, recommends that investors continue to invest, but that they start to pull back on riskier positions. Tesla Motors Inc (NASDAQ:TSLA) looks like one of those stocks headed for a Sweeney Todd style haircut. Investors lucky enough to have taken the ride up should probably take profits.
An Alternative to an Alternative
Keeping with the automotive theme, however, investors can cut their risk by shifting into the companies that provide the fuel for the stodgy old gas guzzlers that still dominate the roads today. Tesla Motors Inc (NASDAQ:TSLA)’s electric cars may be the future, but oil and gasoline are the fuels of today. Here are some discounted oil stocks to look at if sitting on cash isn’t high on your list:
The Local Boy
ConocoPhillips (NYSE:COP) went through a period of heavy acquisition activity. Those purchases proved to be ill fated and the company was forced to shed assets. The 2012 spin off of Phillips 66 (NYSE:PSX), which now owns what used to be the company downstream assets, was the last big transformative event.
So, ConocoPhillips is a good option for investors concerned about the stock market and venturing into inhospitable locals for an energy source destined to be in high demand for the foreseeable future.
Best Risk Adjusted Choice
For those willing to take on a bit more risk, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is probably the best choice. It is one of the largest oil and natural gas companies in the world. Unlike ConcocoPhillips, Shell’s business spans from pulling oil and gas out of the ground, to refining it, to filling automobile gas tanks. However, Shell has much more exposure to international markets.
One big knock against the company today is its investment in U.S. natural gas. New drilling methods have led to historically low domestic gas prices. That will continue to be a drag until prices recover. However, management believes that natural gas is destined to overtake coal as the number two energy source in the world.
So, natural gas could be a valuable asset in the not to distant future. Moreover, Shell has notable experience with liquified natural gas in Europe. Although low gas prices and a weak Europe have been a weight on the shares, income investors looking to shift to an out of favor name would do well to take a look at this 5% yielding stock.
An Eiffel Good Option
Bad puns aside, TOTAL S.A. (ADR) (NYSE:TOT) is another giant oil and natural gas company worth looking at. The company hails from France, but its operations span the globe. Not as well known as Shell in the States, its about 5.5% yield is around twice that of Exxon Mobil and over two percentage points above Chevron Corporation (NYSE:CVX)‘s.
Operating in financially struggling Europe has been a drag on results. Total, however, is financially strong and should weather the difficulty in stride. Meanwhile, the company has been investing heavily in new reserves. The average replacement rate between 2010 and 2012 was 136%, up from just 75% between 2007 to 2009. Total is clearly moving in the right direction.
In Demand
Oil and natural gas aren’t going out of style any time soon. Investors would do well to consider the trio above for yield and relative safety in a risky market. If the market should get a quick haircut, or a little beheading, TOTAL S.A. (ADR) (NYSE:TOT), Royal Dutch Shell plc (ADR) (NYSE:RDS.A), and ConocoPhillips (NYSE:COP) should hold up reasonably well and pay you to stick around.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors and Total SA. (ADR). The Motley Fool owns shares of Tesla Motors.
The article Avoiding A Sweeney Todd Haircut: Part Two originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
