A Question of Value

Holding stocks in a volatile, range-bound market can be a harrowing experience for investors. However, these environments also offer plenty of opportunities for disciplined investors who pay close attention to valuation and buy high-quality names when the stocks sell off temporarily.

In late May, we highlighted the oppotunity to purchase shares of our favorite offshore contract drillers at a discount, citing the tightening supply-demand balance in the market for ultra-deepwater rigs. This strategy has panned out thus far, with shares of SeaDrill (NYSE: SDRL) returning 15.2 percent and our position in Ensco (NYSE: ESV) gaining 19.3 percent. We remain bullish on this industry and would add to these holdings on any pullback in the broader market.

Subscribers often ask for our take on international oil companies and often ask why ExxonMobil Corp (NYSE: XOM) doesn’t appear in the model Portfolios. The short answer: Although we regard this stock as a foundational holding for many portfolios, we prefer other names that offer superior upside in the near term.

In the past, we’ve purchased discounted shares of ExxonMobil as a short-term trade. We booked a 17.7 percent after holding the stock from Aug. 24, 2011, to Jan. 5, 2012, and netted a roughly 40 percent gain between July 2010 and June 2011. Until the stock price pulls back to a reasonable valuation, we will remain on the sideline.

In This Issue

The Stories

1. ExxonMobil Corp is a foundational stock for any investment portfolio, but shares of other international oil companies offer better near-term upside. See Big Oil.

2. We’ve geared our stock selections to take advantage of rising day-rates on fixtures in the capacity-constrained ultra-deepwater market, where few rigs are available in 2013. See Knowing the Drill.

The Stocks

ExxonMobil Corp (NYSE: XOM)–Hold in Energy Watch List
Eni (NYSE: E)–Buy < 52 in Conservative Portfolio
Total (NYSE: TOT)–Buy < 57 in Conservative Portfolio
SeaDrill (NYSE: SDRL)–Buy < 45 in Aggressive Portfolio
Ensco (NYSE: ESV)–Buy < 60 in Growth Portfolio
Pacific Drilling (NYSE: PACD)–Buy < 11 in Growth Portfolio

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