Ready for a Bear Market?

The Investing Daily Summit

This past week I spoke about energy investing at Investing Daily's annual Investing Summit in Alexandria, Virginia. After listening to the other speakers and talking to a number of attendees, it was clear that the specter of a bear market was on almost everyone's mind. This is especially true for those who may have a short time horizon for their investments, as historically even conservative holdings have taken steep plunges during market downturns.

Over a longer period of time, good companies bounce back. But let's take a look at one of the major integrated oil companies in order to gain a better understanding of how much can be lost in a downturn, and how quickly.

Chevron (NYSE: CVX) reported disappointing earnings last week, but over the past decade has been one of the best performers among the supermajors. Over the past five years Chevron has handily outperformed ExxonMobil (NYSE: XOM), while paying a better dividend to boot (3.4 percent annualized versus XOM's 2.7 percent).

Most people would be happy to have had Chevron in their portfolio over the past decade or so, but let's take a closer look at some short-term performance to gain perspective on what can happen even if you buy a solid company like Chevron just before a market downturn.

Since the beginning of 2000, Chevron has returned a total of 297.5 percent to shareholders (including dividends). By comparison, ExxonMobil returned 209.2 percent, BP (NYSE: BP) returned 54.9 percent, and the S&P 500 returned 107.3 percent. (BP demonstrates a different sort of risk, which I plan to discuss in a future column.)

If you had bought Chevron the first week of 2000, just seven weeks later you would have been down 20 percent. During the spring of 2000 yo! u would have gotten back into positive territory, but the dot-com collapse would soon have a chilling impact on the market. You would have ended the year with a modest loss, you would have been back in modestly positive territory in 2001 and early 2002, but the stock market downturn in the second half of 2002 would have had you back underwater.

By January 2003 your January 2000 Chevron purchase would have been down by nearly 30 percent. It would be early 2004 before you broke back into positive territory, but it was about to make a strong move up. How many would have held onto their shares in this situation? After four years and being down nearly 30 percent — on a conservative investment no less! — how many would have thrown in the towel?

From its low point in 2003, Chevron would catch the wave of higher oil prices and treat investors to a 260+ percent total return over the next five years. The stock would peak in May 2008, shortly before oil prices plummeted from well above $100 per barrel back down, albeit briefly, into the $30s.

There would be several reversals on the way to that big gain. In the five-year period leading up to May 2008, there were several corrections of more than 10 percent. Between February and May 2005 Chevron shares dropped 17 percent. Between September and October of that same year, shares pulled back 13 percent.

There were a couple of reversals in 2006, and then volatility spiked in 2007. July 2007 saw shares pull back 13 percent, only to be back in record territory by September. There would be a near 10 percent pullback in September/October 2007, and from Christmas Eve 2007 shares pulled back 16 percent over six weeks.

Best Defensive Companies To Watch In Right Now

Things would really heat up in 2008, as oil prices made their historic run. From that low point in February 2008, shares would run up 27 percent before peaking in May. By ! July 25 t! he stock had dropped 20 percent, but oil prices were about to collapse and send all oil shares down sharply.

By October the share price of Chevron was down 44 percent from its May 2008 highs. Shares rebounded from that low point and ended the year down 21 percent, but this was in the midst of a bear market that inflicted even worse losses on the S&P 500 and the Nasdaq. Further, oil prices declined 80 percent during the year — from $145/bbl on July 14 to $30/bbl on Dec. 23.

Had you bought at the peak in May 2008, you would have spent the next three years in negative territory, but today you would be sitting on nearly 24 percent of capital appreciation in addition to a dividend that ranged from 2.5 percent to 3.5 percent annually over that time span.

Conclusions

It's impossible to know without the benefit of hindsight whether we are on the cusp of a bear market that could send shares of even conservative companies tumbling. When one does come along, individual investors will need to understand their risk tolerance and time horizon so as not to get shaken out of the stocks with the best long-term prospects.

If your time horizon is five years or more, a major integrated oil company like Chevron can be a  solid addition to your portfolio. If your risk tolerance is higher, then there are plenty of more aggressive options. But don't invest in any stock with money you might need in two years. Even a great company like Chevron could have sent you into negative territory for three or four years if you bought at the wrong time, and there were times you could have faced a 40 percent loss if you bought at a particular peak.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Clear Sailing for ConocoPhillips

Conservative portfolio holding and #6 entry on our Best Buys list ConocoPhillips ! (NYSE: CO! P) has been shifting its focus toward US oil plays with the intent on growing crude production by 3-5 percent annually until 2017. On Friday ConocoPhillips delivered an earnings report card that beat market expectations and indicated the company remains on track to meet its production growth objectives.

First-quarter 2014 earnings came in at $2.1 billion, or $1.71 per share, easily beating the Street's average estimate of $1.56 per share. The company's total realized price was $71.21 per barrel of oil equivalent (BOE), compared with $68.57 per BOE in the first quarter of 2013. The company cited higher natural gas, bitumen and natural gas liquids prices for the increase. Cash margins improved to $32.07/BOE, up from $29.07 in Q4 2013 and $26.80 in Q1 2013.

Production for the quarter was 1.53 million BOE per day, an increase of 3 percent over Q1 2013 when adjusted for dispositions and downtime. Growth came primarily from the liquids-rich unconventional plays at the core of the company's expansion plans. The Eagle Ford and Bakken collectively delivered 183,000 BOE/day for the quarter, a 41 percent increase from the first quarter of 2013. The Eagle Ford and Bakken achieved a new peak daily production rate of 163,000 BOE/day and 54,000 BOE/day, respectively, and added 48 wells during the first quarter.

The stock is now up 18 percent since joining the Conservative Portfolio less than three months ago. Investors who feel like they missed out should monitor the company during the next two quarters, as ConocoPhillips indicated that production will be lower due to planned maintenance — particularly during Q3. Volumes in Q4 are projected to be back above Q1's outstanding performance, so a dip during Q2 or Q3 should be regarded as a buying opportunity. Buy COP on dips below $73.          

– Robert Rapier