Black Gold or Fool's Gold: Is it Safe to Buy Oil Stocks Yet?

By Markets Fool.com

While many investors have been fretting the plummet in oil prices, there is a small set of investors that have likely been licking their lips: Value investors. With oil prices today about half what they were a little more than six months ago and many sources of that oil not making a profit, there is an immense opportunity for someone looking to pick up shares of a few energy companies on the cheap.

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The one thing that may give you pause from companies in the oil business today is the uncertainty about where prices go from here. Is this "the bottom" of prices? What if oil prices plunge even further and you don't time the market just right?

The truth is, I don't know if this is the bottom, and neither does anyone else. That shouldn't keep you from investing in the energy space, though, because the opportunities in the space go beyond the simple spikes and slumps in oil prices.

Oil Prices: Going any which way but where you want them to
At any given moment, there are hundreds of factors that influence the price of oil, and very few of them are dependent upon one another. That's just the reality of a commodity that trades on a global scale, and the centers of production aren't necessarily the centers of demand.

With crude oil production in the U.S. within spitting distance of its highest output of all time and global political conflicts holding back production elsewhere that could come back online, there is potential for prices to fall even further. Then again, there is always the chance that another geopolitical conflict we don't see coming could interrupt an even more important producer such as Russia or even Saudi Arabia or demand for oil could surge as prices plunge and fast growing economies such as China and India turn cheap energy and other natural resources into a boom.

If we look back over the century and a half we have been consuming oil, these kinds of questions have always popped up in one form or another, and if we had always asked ourselves whether investing in oil was a "safe" bet the answer would almost be a resounding no because there are simply too many factors to consider that could derail a company in this space.

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And our gut feeling about the uncertainty in oil prices would be true. Over that 150 year period, the price of oil has averaged one year price changes of 25% or more every 3.5 years. Just enough time for us to get burned by the previous change in prices, forget about what happened that last time enough to convince ourselves that "this time it's different," and then watch it happen all over again.

The scars from falling knives
Despite these factors, though, energy companies remain as strong investments that have generally beat the market. Over the past 10 years -- a time period where we have seen two major collapses in oil prices and an additional collapse in natural gas prices -- the Vanguard Energy Index ETF has still beat the S&P 500 on a total return basis.

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^SPXTR data by YCharts

There is no secret or trick to picking great energy stocks, pretty much all companies worth buyingshare three distinct characteristics. Investing in energy is a completely different animal all together, though. It takes the ability to look beyond what oil prices are doing at that given moment and allow the companies you have invested in to generate capital over the long term. Instead of focusing on whether this is the peak or the trough for oil prices to time your investments just right, spend your time digging into the company itself and determining how it can handle those wild swings in oil prices, both good and bad.

Besides, after holding a company for several years, are you really going to remember that you should have waited another week?

What a Fool believes
A vast majority of financial media coverage in the energy sector is based on what the price of oil is doing on a monthly, daily, or even an hourly basis. To an individual investor, keeping track of prices over that short of a time span is somewhere on the border of completely useless to detrimental to our health. The amount and frequency to which oil prices move could be enough to make one insane, or at least convince someone that there is never a "safe" time to invest in oil and gas companies.

Just remember this when you are worried about catching that falling knife before the market completely bottoms out: Time heals all wounds.

The article Black Gold or Fool's Gold: Is it Safe to Buy Oil Stocks Yet? originally appeared on Fool.com.

Tyler Crowe has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.