Energy companies have plunged sharply—what should investors do?

Yet the market’s consistent pattern is simple contrarian forecasting: as long as the Middle East conflict ends and shipping lanes reopen, oil prices will plummet—but to what level? Sorry, most people neither have the time nor the ability to think that through—or even imagine it. In a few days, Iran’s delegation is confirmed to visit China; reports also suggest Trump may come too, though that has not yet been officially confirmed. Today’s official statements still only say communication is ongoing—negotiations are likely nearly finalized, but officials remain cautious, fearing last-minute reversals by either side. The market may assume both sides’ imminent visits signal the conflict will end, meaning the Strait of Hormuz will reopen, commercial vessels can resume operations, oil shipments will resume, and oil prices will fall. Once oil prices drop, coal, chemicals, and related sectors will follow suit—essentially, all assets that surged due to the conflict will reverse course. Thus, energy and chemical stocks instantly shift from being highly sought-after to widely shunned. This is a fascinating phenomenon: last year, oil prices kept falling, yet stock prices kept rising. No one anticipated the Middle East flare-up; I had even prepared for oil prices to bottom out in Q1 this year. But then the Middle East crisis erupted, sending oil prices soaring—and stock prices spiked accordingly in the short term. Yet since everyone expects oil prices to fall later, stock prices have now retreated. Coal follows the same logic. Moreover, if coal prices decline, thermal power generation costs fall—especially for companies trading primarily on market-based coal prices, whose earnings elasticity is greater. Hence, Datang Power Generation surged for two consecutive days. These examples reveal how much so-called ‘value investing’ is actually pseudo-value investing: investors rarely grasp these companies’ true intrinsic value. They simply label them ‘core assets’—a prerequisite for value investing—and then, in reality, focus solely on whether the stock price will rise or fall tomorrow. This is value speculation—not genuine value investing. I’ve long believed that if you’re going to speculate anyway, you might as well speculate in technology—optical components, semiconductors, aerospace, etc.—where price elasticity is far greater. Speculating on value-investing stocks delivers relatively low returns, with risk levels no lower than those of high-elasticity sectors. Look at today’s surging CPO and PCB stocks—or humanoid robots and AI applications: if you’re speculating, you must weigh expected return against risk. Traditional sectors offer poor risk-adjusted returns—their risk-reward ratio is simply unattractive. When evaluating any company, we must consider both the impact of sudden or uncontrollable events, and the intensity and duration of such impacts. Today’s oil companies are no longer significantly affected by whether the Middle East conflict continues—or whether the ‘floor’ for oil prices rises substantially depending on the conflict’s status. Even if full maritime navigation resumes tomorrow, oil prices won’t revert to prior levels—and full resumption isn’t feasible in the near term anyway. Historically, oil company earnings forecasts were commonly modeled using oil price assumptions of $50, $60, or $70 per barrel—because, absent external shocks, oil prices wouldn’t stay long-term below $50 (production would become uneconomical), nor sustainably high (market mechanisms would automatically restore equilibrium).

Why do stock prices of listed companies plunge despite rising profits?

This is an extremely practical question—and one that confuses many retail investors: ‘The company’s earnings look solid, so why is its stock price falling?’ Let’s state the conclusion upfront: In the long run, stock prices fluctuate around a company’s intrinsic value; in the short term, however, stock prices are driven by market sentiment, capital flows, and valuation levels—not current-period profits. I. In the long run, stock prices track earnings Company operating performance serves as the ‘anchor’ for stock prices. Over a 5–10 year holding period, stock price appreciation generally aligns closely with profit growth. The logic is straightforward: as a company earns more each year, its intrinsic value grows—and its stock price will eventually reflect that. As Benjamin Graham famously said, ‘In the short run, the market is a voting machine; in the long run, it is a weighing machine.’ In other words, short-term prices reflect sentiment, while long-term prices reflect substance—i.e., the company’s real economic value. II. Why does stock price fall despite rising profits? If a company’s profits genuinely increase yet its stock price falls, several scenarios typically apply: 1. The profit growth is ‘illusory’ Don’t just glance at net income attributable to shareholders—dig deeper: • Did non-recurring-adjusted net income grow in tandem? If net income attributable to shareholders rose but non-recurring-adjusted net income stagnated or declined, the core business hasn’t improved—profits were artificially inflated by one-off gains like asset sales or government subsidies. Such growth is unsustainable and ignored by markets. • What’s the quality of those profits? If profits rise while operating cash flow fails to keep pace—or even falls sharply below net income—it signals ‘paper profits’: goods were sold but cash wasn’t collected, leaving only accounts receivable. Markets view such ‘credit-driven growth’ skeptically. 2. The profit growth is real—but expectations were already fully priced in This scenario is even more common. Suppose a stock rises from ¥10 to ¥50—a 400% gain—then reports a 100% profit increase. Though impressive on the surface, the stock price had already fully priced in that growth. For example: if the market expected 50% profit growth but the company delivered only 30%, the 30% growth itself may be solid—but it falls short of expectations. Since the prior high price reflected anticipation of higher growth, the disappointment triggers downward price adjustment.

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