Is The ‘Buy’ Signal Flashing For Oilies BP plc, Royal Dutch Shell Plc & Soco International plc?

Some of the oil companies are starting to look interesting.

We all knew that a fallen oil price might throw up some bargains — well, I think those bargains might be here with firms such as BP (LSE: BP) (NYSE: BP.US), Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) and Soco International (LSE: SIA).

To be or not to be contrarian — there’s a question!

Being contrarian for the sake of it seems fool hardy. Buying when everyone else is selling, buying a falling share price, selling when shares are rising… such methods can lead to the poor house, because it’s easy to be wrong.

Being wrong means shares and other markets we’ve bought keep on falling, or shares we’ve sold keep on rising. Being contrarian means we aim to profit from a reversal. That’s a big call to make. What makes us so clever and all those other investors so dumb? No wonder we are often wrong as contrarians — at least, initially.

The investor’s secret weapon

Forming an opinion based on fundamental analysis about a company or other market, such as the price of oil, is one thing. Backing that opinion with an investment is quite another. It is easy to jump in too soon and go down with the price. When that happens, we may be ‘right’ in the end, but how far away is that ‘end’. Days? Weeks? Months? Years? It may be any of those, but being wrong adds up to suffering an opportunity cost at the very least, as our hard-earned sinks before returning to break-even — eventually, if we are lucky.

It doesn’t have to be like that. Investors have a ‘secret weapon’ that we should probably all use more often. It’s called the price chart, and it finds its way into the toolkit of many successful contrarians such as, for example, well-known one-time fund manager Anthony Bolton. In the share-price chart, or the chart of other markets such as oil, we have a ‘picture’ of the collective weight of investor opinion or, to use another term, sentiment.

Wait for confirmation

Insight into the thinking of the entire investment community, as expressed in a price chart, is a valuable thing. Because markets are forward thinking, price movements can be informative — they can tell us what investors as a whole think will happen next. For example, a falling share price still falling might tell us that investors expect further deterioration in business or market fundamentals. Seeing no movement on a chart could mean that investors don’t know what to think. A rising price might mean that investors expect fundamentals to improve.

That’s a powerful signal, isn’t it? If the price is falling, as the price of oil and the share prices of oil companies have been recently, doesn’t it make sense to wait until that price action — the weight of investor opinion — changes, before investing? In other words, doesn’t it make sense for us as contrarian investors to wait for a price reversal to back our opinion that the fundamentals could reverse and improve? I think so. Market movements are not a perfect science, but looking for a price-trend reversal potentially takes us closer to being right as contrarians than we might be by buying a still-falling price.

Right now, the price of oil seems pretty flat, showing that it may have found a bottom. Meanwhile, there are signs that the share-prices of BP, Shell and Soco could be turning — they seem to be inching up, and we can see an early pattern of higher lows forming on their charts. To me, that kind of presentation is the crucial buy signal to look for when buying shares after careful fundamental analysis and valuation.

Attractive valuations

If we believe the price of oil might have stabilised, valuations do seem attractive. Here’s how the firms’ share prices compare to recently reported net asset values per share:

 None seems expensive, but troubled BP is the only firm selling below the net-asset value shown on its last balance sheet. It’s worth noting that BP is still engaged in the process of big asset sales, though.