Themes: Oil Companies, Penny Shares, AIM Market
The great British investor, Jim Slater, once said: ‘Elephants don’t gallop’.
He was referring to earnings growth at large companies. At the time, he compared them to certain small companies, saying some “fleas can jump to over two hundred times their own height”.
To get a feel for what Slater was talking about, just look at the oil sector in the past month. In that time there have been three major oil strikes. First was Gulf Keystone (ticker: GKP). It has found an estimated reserve of 1.5bn-3bn barrels of oil at its Shaikan reservoir in Kurdistan.
Next came BP (ticker: BP.). At its Tiber field two hundred and fifty miles south-west of New Orleans it has found 3bn barrels – perhaps even more.
And following hot on the heels of BP, came British Gas (ticker: BG.). Results from a well test at its Guara field off the coast of Brazil indicated that this could hold 2 bn barrels.
There’s plenty of oil to be found
All of this proves that there is still plenty of oil out there. It also raises new questions and challenges. BP’s discovery is not only way out in the ocean. But the oil is as far underground as jumbo jets fly above it. The challenge of extracting it will be great, as will the task of transporting it to oil-hungry consumers. But that is a matter for the industry’s engineers. What concerns me as an investor is the impact on share prices. Let’s reflect upon this.
‘BP Discovers Giant Oil Field Deep Beneath the Waters of the Mexican Gulf ’, screams a morning headline in The Independent. That must have got BP’s shareholders quite excited. But not for long. BP’s share price edged up just 4%. In spite of this discovery, in spite of the oil price spike last year, in spite of this year’s stock market rally, BP’s share price is still some 10% lower than it was three years ago. If a huge oil strike cannot shift the share price of an oil company, what can?
Much the same is true of BG Group. The Guara field has been a huge corporate success. ‘It is clear that it will make a very material contribution to the production and cash flow of BG Group for many years to come,’ enthused chief executive Frank Chapman. That’s great news and investors were impressed. The shares rose by 10% on the week and are up 75% over three years, while the FTSE 100 is down 12%. BG is a great Blue Chip to own over the long-term, I’m sure.
The power of penny shares
But now look at the impact on Gulf Keystone. Here is a small oil explorer. It does not have a national gas network to run. It does not have operations in all corners of the world performing at various levels. It does not have billions of issued shares over which to spread its fortunes.
Gulf Keystone is focussed. It knows what it wants and its shareholders know as well. So when it makes an oil strike, the benefits are not spread far and wide. They are not diluted by all manner of other interests. Shareholders get the maximum bang for the their buck – a 629% one month gain that BP or British Gas shareholders can only dream of.
And it’s not just the oil sector where this can happen. Readers of Red Hot Penny Shares thought they were doing well last month when Gulf Keystone made an oil strike and the shares soared 629%. But now things have just got even better...
A tiny pharmaceutical company recommended has just announced that, following trials, one of its drug compounds was found to be both safe and effective. Its share price gained 70% on the week. But for those who bought into it when we recommended it just last December, these shares are now 611% higher.
That’s what I call real money. And this is the sort of real money that you can only make in penny shares.
This company is not doing anything that the giants of the industry are not doing. The point is this, though. If you own shares in an ‘elephant’ of a company, spending billions of dollars a year on research, it is far more likely to perfect a new drug. But this will certainly be offset by many failures.
Meanwhile, if you invest in a small ‘flea’ of a company, focussing in just a handful of compounds, there’s a higher risk of failure. And that failure can wipe out your investment.
But the flipside, the pay-off, is that any success in a small company like this has the potential to transform the business – and transform the fortunes of its shareholders. That’s what shareholders in Gulf Keystone discovered recently – and what shareholders in this tiny pharma stock are seeing right now.
High risk opens up the chances of very high rewards. That’s why you can make such big money in penny shares.
Good investing,
Tom Bulford
For The Right Side
Editor’s Note: Tom Bulford writes a twice-weekly e-letter called Penny Sleuth, which is a great way to start learning about penny shares if they’re new to you.
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