Link to calculation sheets: https://docs.google.com/spreadsheets/d/15w4aqCoAe6X9rdpqhC4jo0w8n5CAkGinBMCUxkbWQrw/edit?usp=sharing
Now as humankind coming into fourth Technological revolution, the old school of oil investment, which created a fortune for a few generations of wealthiest people in 20th Century in the first half of it, but in our days loses its ground. Oil, gas, steel and all that are created the modern world how we know it based on materially created values, where interaction and transportation based on wheels’ vehicles and aircraft consuming fuel. People need warm and energy to create values whatever it is food or clothes, construction material or machine that creates and use it making all that surround us as signs of modern progress. All these are the symbols of the material world, that massively created by the simplest form of energy transformation that closely associated with oil. However, what is about with investments in the Oil industry for current days? Does investments in oil companies still able to be in the vanguard of wealth creation and to provide its growth and will exceed alternative way of investments. To look at this matter, make a sense to perform the comparison between Oil investments and alternatives, that as instance are Passive index of broad market SPX500 or Oil and Gas ETFs most liquid such as XOP and XLE. As I will demonstrate below Investments in Oil companies have very strong potential to create additional value, that able to compete with other investment alternatives. The core element to obtain premium is investment algorithm and approach to portfolio construction based on strong fundamentals. As will be shown, if as selection criteria to use Value growth investing principles. The portfolio will receive solid grows potential and immunization from a sharp decline during market turmoil and massive drawdown.
Let take a look at OilandGas Value growth portfolio that will be created among the companies that matched with following criteria that based on Value investing idea – low PE with stable dividend payout that is leading in the industry (full list of companies available in calculation link).
- Companies Universe for selection: Oil and Gas industry, Major Oil and Gas (look at calculation link for full list of companies included in ranking)
- Forward P/E less than 15
- Dividend payments for last financial year above 0
- Obtained Sample of companies ranked by dividend yield and First 10 companies that match with selection requirements included in portfolio.
- Frequency of revising – annually in the first working date of each year and equal weight.
The result of such application of investing rules based on fundamental characteristics plotted below, and it indicates how Value based approach in stocks selection can significantly to improve the investment result. Since 2007 the Portfolio based on aforementioned Value investment drivers was able to outperform XOP and XLE and even more – to be better of SPX500. The weak side of portfolio is increased volatility in comparison with spx500, but return almost doubled. Besides Dividend yield of OilGas Value growth portfolio in average in 2.4 times higher than SPX 500 dividend yield. The calculation and portfolio settings using selection rules introduce at calculation link. Also last tradable portfolio can be observed from downloaded file and its core fundamentals applied as selection criteria can be observed from calculation sheets.
As you may note, OilGas value strategy shows how efficiently portfolio rotation works based on selection of tools that focused of detection the high quality equities, that have strong value growth performance and prospects. As instance OilGas value was able to be in positive CAGR in comparison with OilGas focused ETF that showed negative dynamic.
Furthermore, I will add more extended period of records and will show portfolio dynamic based on Value investing since 2000 in comparison with Nasdaq, SPX500 and XLE. From 2000 to 2006 there was very interesting period of Hydro Fracking revolution, that created fantastic bull run in oil and gas industry. I intentionally omitted this period of time from 2000 to 2006 to exclude influence of overheating in industry and to demonstrate pure value investments.
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