Oil-Patch Bargains

By James J. Cramer

Hardly a day goes by when some Wall Street analyst doesn't knock the oil-services industry. These companies, which help the oil giants explore and drill for crude and natural gas, were market darlings from 1995 to 1997, but now have more detractors than anything west of Indonesia. Though many oil-service firms are already trading near two-year lows, analysts' earnings estimates for them will soon be revised further downward. No brokerage will want the likes of Halliburton or Schlumberger on its "recommended" list. The gloom around these stocks is only deepening. And I am buying them hand over fist.

Why bet against Wall Street? Because I'm watching the relative handful of folks who know more than the analysts. Insiders--the executives who run most oil-service companies--are buying company stock. And they're doing it massively and unrelentingly, with a voraciousness I haven't seen since just after the 1987 crash--when insiders scooped up cheap company stock that made them fortunes.

I usually ignore individual insider buying. A senior vice president picking up a few thousand shares of his drug company here and there means nothing to me. But when top-level officers across an entire industry make multimillion-dollar repeat purchases, I sit up and take notice.

What do these insiders see that Wall Street doesn't? Are they thinking that oil prices can fall no lower than they have? Do they know something about OPEC that we don't? No. What these executives see is that their stocks' prices reflect overly pessimistic assumptions by Wall Street--just as those stocks reflected overly optimistic assumptions when many of the same insiders were selling frantically a year ago, for double and triple today's prices.

They know that even when prices are low, oil is a finite resource; that new reserves must be discovered and tapped so the big, integrated companies like Exxon and Mobil can stay in business. These executives know that when the going gets tough, the oil-services industry consolidates. They know their companies are going to stand among the survivors.

And they are confident that someday not far off, Asia and the rest of the developing world will come rumbling back, expanding their factories and the living standards of their people, who are going to buy more cars and air conditioners and electricity. And all of those dreams run on oil and gas.

Want to jump into this group with me? First, make sure you can handle the pain that's going to come before the gain. Understand that a lot of investors who took capital gains earlier this year are going to be looking to offset those gains with losses between now and year's end, for tax purposes. They're going to sell some of their losers, including oil-service stocks. So while these stocks are attractive now--otherwise, remember, insiders wouldn't be buying--their prices might well go lower before they go higher. Decide how much you want to invest, and start buying immediately. But hold some money back to buy more later this year.

Go with the well-known players like Baker Hughes and Schlumberger, where insiders have bought $1.6 million and $286,000 worth of stock since June. Or buy a good sector fund like AIM Global Resources or Fidelity Select Energy Services. And be patient. We won't see a big pop in these stocks until East Asia bottoms out.

Cramer runs a hedge fund and writes for thestreet.com He holds an investment in Schlumberger. Nothing in this column should be construed as advice to buy or sell stocks.