Crude oil prices seem to have stabilized with Brent closing at $66.76 on Friday for Jan, 2019 delivery. The dramatic over 25% plunge in oil prices since the peak reached in early October caught many off-guard. While further declines are possible some investors may be wondering if now is the time to add some positions in a phased manner. Nobody knows how low oil can go and if an investor waits to catch the bottom it may be too late before prices sharply rebound.

Russ Koesterich of Blackrock noted in a blog post that stocks are cheap now and the selling may be overdone. From the post:

1. Based on price-to-book (P/B) the energy sector is now trading at the largest discount to the S&P 500 since at least 1995 (see Chart 1). Energy stocks are currently trading at roughly a 50% discount to the broader market.

2. The sector also appears unusually cheap on an absolute basis. At less than 1.7x earnings, the current valuation is the cheapest since early 2016 and is in the bottom 5% of all observations going back to 1995.

3. As you would expect, the valuation of the energy sector tends to move (roughly) in tandem with oil prices. When oil prices are lower, the sector’s relative value versus the market also tends to be lower. Since 1995, this relationship has explained approximately 20% of the relative multiple of the sector. Based on oil prices at $60/barrel, history would suggest that the sector should be trading at a 15% discount to the market, not a 50% one.

Source: Why the energy stock selloff may be overdone, Blackrock

Among the foreign oil ADRs trading on the US markets, Petrobras(PBR) and Ecopetrol(EC) are up by 40% YTD. Brazilian stocks shot up after the recent elections there and PBR has recovered nicely as well. However it is still far below the $60+ reached many years ago before the major fraud was uncovered and Operation Carwash launched to cleanup the mess.

Among the oil majors, Total SA (TOT) and Eni SpA (E) are in the positive territory YTD while BP PLC (BP) and Royal Dutch Shell PLC (RDS.A) and Royal Dutch Shell PLC (RDS.B) are in the red.

The complete list of integrated oil companies trading on the NYSE can be found here.

Disclosure: Long PBR and EC

US firms are increasingly spending more of their earnings on stock buybacks than dividend payments to shareholders. One of the main reason for this is that the tax rate on capital gains is lower than that of dividends for investors. Hence investors are content with companies buying their own stock than returning cash to them as dividends.

The chart below shows the dramatic growth in buybacks over dividends in the past few decades:

Source: Six reasons you should care about share buybacks by Duncan Lamont, Schroders

From the above article:

As the chart below shows, US companies spent around $200 billion in buybacks and around $100 billion in dividends in the year to June 2018. Compare that with around $30 billion of each 20 years earlier.

Mr.Duncan makes a few other interesting observations regarding buybacks in that piece. Readers may want to review the rest of the article.