Core Concepts: No Bargains in Oil Stocks

The vast majority of analysts are consumed by short-term considerations. They focus on earnings in the quarter just past and on upcoming quarters. As a result, the market is quite efficient in discounting short-term information into stock prices.

However, almost no analysts exclusively appraise companies by using a long-term framework. Therefore, it's reasonable to conclude that there must be market inefficiency once you move beyond the next few quarters.

For example, take a look at what happened to J.C. Penney (JCP - commentary - Cramer's Take) and Office Depot (ODP - commentary - Cramer's Take), two stocks I discussed in a column back in late 2000.

At the time, analysts were quite accurate in their assessment of these companies' short-term problems. In addition, their earnings estimates were generally on the mark. What they didn't see was the potential in these names, and the stocks have both witnessed huge runs since then. The blind spot in the analyst community isn't in its short-term view. It's in the long-term view -- because usually there isn't one.

As I continue this series on searching for undiscovered value using a sector-by-sector approach, each company is reviewed in a long-term context. (See my two previous columns on chemical stocks and the computer and office-supply sectors.) Besides the obvious analytical advantage of doing something that most other investors don't do, the system has other notable benefits.

First, you can ignore the economy. Long-term investors know that we'll have both good and bad economic cycles over a period of years. On a net basis, then, the economy is irrelevant.

So are interest rates. Let other analysts fret about the Fed's next move; it just doesn't matter to long-term investors. We'll see a steep interest rate curve again in the future, and we'll see another inverted curve, too. Net it out, and it also is irrelevant.

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At time of publication, Alsin and/or ACM had no positions in any of the stocks mentioned in this column, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor, and portfolio manager of The Turnaround Fund, a no-load mutual fund. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.