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July 29, 2002;
Low-Debt ChevronTexaco Depressed by Index Selling Understandably as the global investment business has grown and become more sophisticated it seemed increasingly inappropriate that a European domiciled company, Royal Dutch Petroleum, be included in a U.S. index, the S&P 500. Nonetheless dropping such a large company from an index that is the actual model for stock selection for so much money has had a disruptive, artificial impact on energy stocks. We could see the impact as the McDep Ratio for RD dropped to be equal to that for our recommendations CVX, COC/P and MRO. That was the trigger for our renewed recommendation of RD. Then after RD found a stock price level where it stabilized, prices for the other three dropped and previous McDep Ratio relationships began to assert themselves, but at a lower level. Presumably some investors sold those stocks to buy RD at a tempting price while other investors who weight energy holdings by the S&P index sold the other stocks. Without knowing all the details of how we got here, we do know that we have confidence in the investment potential of our recommended stocks. The degree to which RD and CVX dropped in stock price further impressed us because both have low ratios of Debt to Present Value of 0.12 and 0.16 respectively. Low debt stocks should normally go up and down less than average and less further than high debt stocks. The McDep Ratio helps us keep debt in perspective. Presumably a change in industry conditions would affect the denominator of the ratio similarly for similar companies. At constant relative value, the numerator, market cap and debt, should change by the same amount also. An equal percentage change in the total of market cap and debt should be a higher percentage change in the stock with a higher proportion of debt/lower proportion of equity.
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