Buy on bad news

A well-known Wall Street adage is a piece of wisdom that’s worth reminding clients about periodically: Buy on bad news, sell on good news.

In other words, when others are selling, think about buying. Investors who bought into the stock market early in 2009, while many others were dumping equities, gained big.

The current slump in oil prices — and therefore in oil stocks — likely is one of the times investment advisers might want to counsel clients with long-term horizons to consider adding the oil sector to their portfolios, or adding to existing positions, either through oil-specific mutual funds or exchange-traded funds.

The benchmark Brent Crude oil recently dropped to below $55 a barrel from a peak of $140 a barrel in mid-2009. The price collapse has been driven by increased production — much of it in the U.S. — and reduced demand at the same time economic growth has slowed in much of the rest of the world, particularly China.

The NYSE Arca Oil Index (XOI), which counts ConocoPhillips (COP), Chevron Corp. (CVX), Hess Corp. (HES) and ExxonMobil Corp. (XOM) among its big oil components, was up about 10% late last week, rebounding from a two-year low on Dec. 15. Even with the slight uptick, though, it’s down 12% for the year.

SLOWDOWN WON’T LAST

While the higher production levels probably will continue — though perhaps not at current levels, as some marginal wells become uneconomic and are shut down — the slowdown in the rest of the world likely will not last forever.

When economic activity in China and Europe begins to recover, so too should oil prices as demand rises to meet supply. On could argue that the lower price of oil should actually help that recovery by reducing the price of gasoline and oil-based products to consumers.

Long-term investors should be dollar-cost averaging into the oil sector, with the understanding that the prices of oil stocks will not remain as depressed as they are at this point. Even investors hurt by the drop in oil can benefit by buying into the sector when the price is low, thus reducing their average price.

In fact, investment advisers and their clients ought to look at other commodities for opportunities to buy low in anticipation of eventually selling high.