Why Oil Stocks Belong In Your Stock Portfolio

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Here is a crazy statistic that crossed my desk recently about the performance of the Big Oil supermajors in relation to the S&P 500 over the past twenty years: every single supermajor outperformed “the market” since July 8th, 1993.

Over that time frame, BP returnd 9.6% annually.

Total SA returned 10.9% annually.

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Chevron returned 12.7% annually.

Exxon returned 11.8% annually.

Conoco returned 12.0% annually.

Meanwhile, the S&P 500 returned 8.6% annually.

The secret to the success of the big oil companies is that they are able to fire on all cylinders: they pay a healthy dividend, they buy back their own stock, and they put in the needed capital expenditures to fuel future growth. It is a great way to add meaningful diversification to your portfolio because when oil prices rise, most other S&P 500 stocks fall, and vice versa. That is to say, when oil prices are rising rapidly, your oil stocks will go up while your other holdings might experience a bit of a drag.

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Investing No-Brainer: Own Stocks That Can Easily Raise Prices

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In his book Common Stocks and Uncommon Profits, Phil Fisher makes the point that it is not what is currently known about a company’s cash flow that matters, but rather, what comes to be known about a company’s profit potential in the years after we buy a given stock.

As Fisher says on page 64 of his book, “Some companies are in the seemingly fortunate position that they can maintain profit margins simply by raising prices. This is because they are in industries in which the demand for their products is abnormally strong or because the selling prices of competitive products have gone up even more than their own.”

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