COP

It's been a depressing time to read (or write) about all things stock market. Even after an impressive surge off its lows, the S&P 500 is down around 38%. Some stocks have been beaten down twice as much. Professional investors everywhere are looking foolish. Bill Miller of Legg Mason, for example, once beat the S&P for fifteen consecutive years. He lost enough in the last two to wipe out all those gains. Other famous value investors, hedge fund managers, and wall streeters have languished amongst the turmoil. Like Twain, reports of the stock market's demise, my friends, have been greatly exaggerated. The stock market will, at some point, rise again.

I've seen proclamations that value investing is dead, as the wild swings of the market have been a playground for day traders and momentum investors. The more things change, the more they stay the same, I guess. People are always trying to prove that Warren Buffet and his methods are no longer viable, or that he was lucky, or that they've finally out smarted him. Regardless, bargains seem to abound. The S&P is trading at about 12 times earnings, down from the 40 it was trading at in 2000. Usually that would mean stocks are cheap (or that people are projecting that earnings are going to fall). One case of seemingly ridiculously low earnings is ConocoPhillips (COP).

COP is trading at a paltry 4.36 times earnings. There are logical reasons for this: oil prices keep falling, to what I feel are ridiculously low levels. Demand has fallen to the point that production is slowing in an effort to prop up prices. Oil was too expensive at $120 a barrell and is too cheap now at $40. Based on the low price of oil, many of COPs reserves are valued lower (at market). Further, profits are likely to fall along with falling demand and prices. The inverse of this is that COP, the company (as opposed to the stock), can now acquire oil at these bargain basement prices. I feel they can do this with confidence that prices will rise in the future.

COP is trading at just 0.86 times it's book value. In theory, that means that if you liquidated COP and paid out the value of the share price in dollars, you'd still have $0.14 per share left over. (This is based on accounting figures from yahoofinance - you should only rely on numbers from edgar, their annual reports, or direct communications from the sec)

As a bonus to being cheap, COP also pays a dividend, currently 1.88 per share, or 3.5%. According to Buffet, dividends are a vital consideration because historically about 50% of the markets gains have come in the form of dividends. Because COP earned more than $12 per share last year, there does not seem to be any concern that their dividend is on the chopping block.

I actually got into this stock at $45/share and am estimating its fair value at between $75-$100 per share, depending on the future price of oil. I will look to sell somewhere in that range, preferably sometime within the next 5 years. It's current market price is $53.39, and you could have gotten in as low as $41.27. That $12 gain from then to now (about one month) would have been about a 33% gain on your money (if my math is correct)...that's something that would make any value or momentum investor very happy. My advice to you is to load up on COP - Warren Buffet was doing that very thing at between $60 and $70, meaning he probably perceives fair value at $120+. He typically buys stocks to hold them a very long time, and COP now comprises a top five holding of Berkshire Hathaway, in terms of size. Consider following his lead. He's still the smartest person in the room when it comes to finance and investing.