The Fool’s Take
Oil prices have slumped this year, due to both demand concerns and increased supply. Some producers are better positioned to weather lower oil prices than others. ConocoPhillips is in that group, and it’s a compelling oil stock in this current market environment.
ConocoPhillips CEO Ryan Lance discussed that market environment on the company’s recent first-quarter earnings conference call. He stated, “The ultimate depth and duration of this current price environment remains unclear.” He noted, though, that “ConocoPhillips is built for this, with clear competitive advantages.”
ConocoPhillips has a disciplined capital allocation strategy that it says is “battle-tested through the cycles.” It recently showcased this discipline by reducing its guidance for capital spending by $500 million and for operating costs by $200 million in response to lower oil prices. Despite cutting spending, the company maintained its production guidance: It’s delivering the same oil and gas volumes for less money.
ConocoPhillips is also a dividend payer, with a recent dividend yield of 3.7%. The company has solid growth prospects, and its combination of cyclical and noncyclical characteristics makes it a promising oil stock to buy and hold for the long term.
Ask The Fool
From W.D., Cheyenne, Wyo.: What does “initiates coverage” mean?
Banks and brokerages often employ analysts to research companies and report on their attractiveness as investments.
Initiating coverage of a stock means at least one of their analysts has begun to follow the stock and will report on it regularly — often labeling it with a rating such as “buy,” “hold” or “sell.” (Sell ratings are fairly uncommon, in part because the analyst’s employer may not want to offend a company with which it might do business, currently or in the future.)
Many brokerages offer informative research reports on companies, so check out what research yours offers.
You can read up on top brokerages at Fool.com/money/buying-stocks. To see many stocks that Motley Fool analysts have recommended, try our “Stock Advisor” service at Fool.com/services.
From P.T., Dunbar, W.V.: What’s a fund’s “NAV”?
The letters stand for net asset value, which is used to calculate the fund’s value per share. A mutual fund or its cousin, an exchange-traded fund (ETF), will typically hold many different securities along with cash and cash equivalents.
With a mutual fund, the total value of its holdings is tallied (usually at the end of the trading day) and any money owed is subtracted. The result, divided by the fund’s number of shares, is its net asset value per share (the cost to buy or sell shares). With ETFs, NAVs are calculated regularly throughout the day.
Note that the NAV doesn’t for dividends, interest or realized capital gains (from assets sold at a profit) distributed to shareholders. So when evaluating a fund’s performance, focus on its “total return,” not its NAV.
The Fool’s School
One of the first things economics students learn is the difference between microeconomics and macroeconomics. It’s a valuable distinction for all of us to understand — not just economists. By learning about these fields, you can better understand factors that affect countries and businesses, and those can also help inform your investment decisions. Here’s a brief look at the .
Macroeconomics focuses on how the overall economy works, on a regional, national or global level. It looks at the relationships between factors such as inflation, employment rates, gross domestic product (GDP), price levels, monetary policy — often trying to determine what will boost economic growth. Other concerns within the field include business cycles, national debt, interest rates and international trade.
Microeconomics takes a narrower view, studying how individuals and companies act and react. It considers factors such as supply and demand, labor markets, costs of production, price elasticity (how flexible consumers are about what they’re willing to pay) and competitive advantages. The field studies the behavior of buyers and sellers, observing or predicting the results of various actions, such as the lowering of prices or the raising of wages.
Competition is a particularly important topic to understand, as the most successful companies often have sustainable competitive advantages. Examples include a strong brand (think Coca-Cola or Disney), economies of scale (Walmart or Amazon.com), barriers to entry (Boeing) and switching costs (think of Apple and how much of a hassle it would be to switch to another technology ecosystem).
The microeconomic concepts of monopoly and oligopoly (when a market is controlled by just a few companies) are also important: A business that’s a near-monopoly has a lot more freedom to raise prices, while companies in competitive industries don’t.
Learning more about economics can make you a savvier observer of the business world and perhaps a better investor, too. You might check out MRU.org or KhanAcademy.org, or read “Economics for Dummies” by Sean Masaki Flynn (For Dummies, $25).
My Smartest Investment
From C.M., online: My smartest investment involves buying based on product performance knowledge. A few years ago, I saw that Palantir stock was trading for around $8 per share. Before retirement I’d been in the Navy’s Acquisition Workforce, where I’d learned that Palantir had a great product.
Based on that insight, I purchased a large block of its stock. As of today, I’ve had a 1,467% return on my investment over the last two years. While not all my investments have experienced such gains, I believe knowing the quality of the product a company offers is a key factor in investment decisions.
The Fool responds: A sound investing maxim is to buy what you know. You’ll likely get better results if you’re buying into companies and industries you understand well.
That said, don’t load your portfolio with only one (or two or three) kinds of stocks. Diversification can protect you in case one (or more) of your main investments takes a nose dive. Understanding the quality of a company’s offerings is clearly valuable, too.
But while it’s a key factor, it’s not the only one. Plenty of investors have been burned by investing in the maker of an obviously superior product without considering Other factors: the company’s financial health, and competitive advantages.
(Do you have a smart or regrettable investment move to share with us? Email it to [email protected].)
Who Am I?
I trace my roots to 1970, when my founder (and namesake) — who had devised the first plastic egg carton — launched a company to make containers.
In 1974, I created the famous “clamshell”-style container now used by many fast-food companies. I went public in 2005.
Today, based in The Woodlands, north of Houston, with a recent market value around $2 billion, I’m a chemicals specialist, raking in some $6 billion annually. I employ more than 6,000 people in about 25 countries. Women make up fully 50% of my board of directors, which is a lot more than average.
Who am I?
Forget last week’s question? Find it here.
Last week’s answer: A.T. Cross