NEW YORK — Bargain hunting can be a thrill, but remember that it can also be dangerous.
Brave investors are picking through energy stocks, looking to buy those pummeled by the plunging price of oil. Billions of dollars flowed into energy-stock funds last month, a huge leap from the norm, enticed by prices marked down by 25 percent or more since last summer. But many mutual-fund managers and other professional investors have a warning for the bargain hunters: Don’t be surprised if it takes years for the prices of energy stocks to recover fully.
Buying low is one of the bedrocks of value investing, and energy stocks are certainly less expensive than a year ago. But many money managers are waiting for them to fall even lower. In the meantime, they’ve pulled out of the way and are content to rubberneck.
At the center of the debate is the cascading price of oil. After hitting a peak around $107 a barrel in June, the price has dropped by more than half and settled Thursday at $46.25. Supplies are more plentiful because of increased U.S. production, while weak economies in Europe and elsewhere are pulling down on demand.
Cheaper oil means there will be steep cuts in the profits of energy companies. Analysts expect earnings for those in the Standard & Poor’s 500 index to plunge about 30 percent in 2015.
When the price of oil began its slide in the summer, investors fled. For three straight months, they pulled money out of mutual funds and exchange-traded funds that specialize in energy stocks. The selling hit a height in September, with a net withdrawal of $2.3 billion, according to Morningstar.
But investors soon tiptoed back into the group, and the buying exploded in December when net investment in energy funds surged ninefold from November to $3.2 billion. On its own, the Energy Select Sector SPDR ETF attracted a net $2.1 billion.
It’s not clear yet who is doing the bulk of the buying, but David Mazza has seen interest from private banks and investment advisers who manage money for relatively wealthy individuals, ones willing to make investments they don’t intend to touch for years. Mazza is head of ETF research at State Street Global Advisors.
“Oftentimes in times of stress, opportunities arise,” Mazza says. “This doesn’t mean energy stocks and energy ETFs are right for everyone, but if someone has a longer-term point of view and is trying to move against the tide, investors are beginning to see there might be an opportunity.”
“Should I also try to buy low on energy stocks?” is one of the most common questions that Bob Doll, chief equity strategist at Nuveen Asset Management, hears from clients.
He tells them it’s best not to try to catch a falling knife. Let energy stocks hit bottom first, because they’re likely to get even cheaper.
