A fund manager who called $30-a-barrel oil before the crude crash now likes energy stocks — at least, some of them.
In 2015, Mark Yusko, founder and CEO of Morgan Creek Capital Management, predicted crude oil would approach $30 a barrel. Now he is buying stocks of oil exploration and production companies, he told investors at the Morningstar ETF conference Thursday night. But there's one big oil stock in a lot of investor portfolios Yusko won't touch.
"This is the time for cyclicals and energy, but pure energy, not ExxonMobil," said Yusko, who runs the Morgan Creek Tactical Allocation Fund and previously managed the endowment offices of Notre Dame University and the University of North Carolina at Chapel Hill.
Yusko called ExxonMobil "the most dangerous stock on the planet today," and he said part of the blame for making ExxonMobil a dangerous investment lies with ETFs. "It traded for 35 years at a 12 PE [price-to-earnings ratio]. Do you know what the PE is now? Thirty, because all the money has gone into low-volatility ETFs and cap-weighted energy indices ETFs."
ExxonMobil shares are up 14 percent this year, double the S&P 500 performance. Its price to earnings ratio is currently even higher than Yusko said, at 35.
ExxonMobil is "not an energy company, but a diversified conglomerate, because they made money when oil prices go up and down," Yusko said. "You need to be short on the big integrators."
Instead, look for pure energy plays like Apache, Yusko said. The stock has climbed more than 12 percent this week after the company's Wednesday announcement of a major oil discovery in Texas' Delaware Basin. Apache claimed it could be the biggest energy find of the past decade.
"There is more oil in the Permian and Delaware basins than in Saudi Arabia. We just didn't know how to get it. Technology has opened up the most unbelievable opportunity for many, many years," Yusko said.
Commodity markets can go to extremes, Yusko warned. Investments in energy stocks can take a long time to play out and lead to wild rides, as demonstrated by the recent poor performance of Yusko's mutual fund, which lost an annualized 4.85 percent over the past three years.
Yusko sees the energy market in a similar situation as 1998 when "the world was awash with the oil" and some economists predicted the price of crude could drop to zero. Back then he invested 5 percent of UNC's endowment into oil and natural gas, and that investment returned as annualized 25 percent over the next decade.
"Today I think we are at the same kind of opportunity set," Yusko said. "The key is that you have to be with the right basins, you have to be with the right technology providers, you have to be with true [exploration and production] companies, not big integrated companies that make money on refining, servicing and processing."