market folly

A while back I wrote a post here where I wanted to see what readers were most confident of in terms of investment theses.

I posed the following questions and then gave some time for readers to answer. I originally said that my answer to the first 2 questions would relate to oil. But, after doing some more research, I'm going to have to change that up ever so slightly. My first answer will not relate to oil, but my 2nd one still will. Without further ado...

Contest Question:
1. If you had to pick only 1 stock to hold for the next year, what would it be?

My answer: Potash (POT). Simply cannot ignore the pricing power they have. Huge demand and limited supply = killer combination. Add in the fact that new potash cannot be brought to market for years due to the length of time it takes to bring new potash mines online. I've been long since August 2007 and have yet to see signs of slowing demand. Originally, I was going to go with Transocean (RIG) for this answer. But, after research, I discovered that not many of their rigs are coming up for renewal in the next year. If they had more rigs coming up for renewal at today's higher dayrate prices, then I would have picked them hands down. Not to mention, with oil's rapid price ascension, these stocks could come crashing down should oil prices reverse course in rapid fashion. But, RIG does play into my answer for #2.

Non-Contest Questions
2. What is the investment thesis that you are MOST confident of, hands down, regardless of time frame?

My answer: I'm most confident in the thesis that slowly but surely, oil companies are only going to have 1 last place to look for oil: deep water. Shallow water finds are slowly starting to fade. Oil demand will continue to rise in the future and they are essentially running out of places to look for oil. The only other place to go is deeper. This is evident by Petrobras (PBR) essentially snapping up 80% of the deepwater drilling rigs for their own use. This is a longer term investment thesis, but I really believe that the deep water drillers (not the integrated oils) will be the way to play oil in the future. Transocean (RIG) and Atwood (ATW) are my favorites in the space as of now. There are numerous others you can play though such as Diamond (DO), Pride (PDE), Noble (NE), etc. Note: Although unrelated to drillers, I also think Suncor (SU) and various other Canadian Oil Sands companies will be a great play longer term as well, as they have found their niche in the oil supply market.

3. Of these four alternative energy choices, which investment will yield the best returns over the next 5 years? 'Clean' Coal, Nuclear, Solar, or Wind? (This one's tougher to gauge than you might think, especially with America's uncertain future political environment)

My answer: Over the next 5 years I actually think natural gas will yield the best returns. But, I technically did not list that as an answer choice. So, choosing from the choices above, I would say coal will yield the greatest returns. This mainly stems from my belief that coal will maintain (if not grow) its energy supply 'market share' over the next 5 years as it takes a lot of time to bring other alternatives to scale. For instance, nuclear power could take anywhere from 10-50 years to truly gain approval and be mass implemented. Solar, while ridiculously hyped, is still nowhere near mainstream and could possibly be over-reliant on subsidies. Don't get me wrong though, solar could easily be the victor out of the group in 5 years time simply due to rapid adoption/expansion. Wind could gain a massive following over the next 5 years as well, now that Boone Pickens' plan has surfaced (I wrote these questions long before Pickens' plan was public). So, with those recent developments, wind could see a very meaningful push in the coming years. But, for me, it came down to the fact that coal already supplies a ton of the world's electricity. Not to mention, there is high demand for metallurgical coal for steel. Even if all the other alternatives listed above do make positive strides towards bringing new energy supply to market, power generated from coal will still be a necessity. I summed up why you need to be in coal in this post here: How to Play Energy in the Immediate Term.

So, there you have it. Would love to get feedback to see what people think of my theses. And, if you haven't already, check out the the comments section of the original post here to see what readers' answers were. There were definitely some good ideas in there. Also, if you didn't have a chance to voice your opinion, feel free to leave your answers in the comments section of this post and hopefully we can get another discussion going.