Smead urges caution for oil investors

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US equity investor Smead Capital Management’s CEO and CIO William Smead has urged caution amid the ongoing depressed price of oil and related energy sector shares.

The warning comes amid data suggesting US listed oil and energy companies have been heavy sellers of new shares, while buyers have continued to come to the market amid expectations that Smead compares to the bear market in technology stocks in the early 2000s.

Then, many investors continued to buy technology companies, despite a bear market, in the hope that they would rebound. This did not happen.

Today, Smead says, the data on the number of oil rigs still in existence in the US alone suggests that there is a long way to go before the sector becomes a broader buying opportunity.

“Normally a substantial price drop and insider buying would get us interested in a sector of the S&P 500 Index which has been drubbed like the oil sector has,” Smead wrote in a note to investors.

“However, we are very conscious that value traps exist based on being years early investing in a sector that may have not yet had its darkest hour in the eyes of investors. In our view, we are still early in the energy sector as it moves from sheer excitement and enthusiasm to contentiousness and utter distaste. We will continue to wait for better prices and the day when most professional investors see no future success in the arena.”


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