Some Thoughts on the Energy Market
Energy stocks haven’t been the best investment over the past several months largely due to falling oil prices. While the S&P 500 is up around 10% on the year, energy stocks within the index are up just 1%. Over the next 12 months, this trend could certainly reverse as crude oil and natural gas prices have already begun to rebound. But why wait until then? The energy industry is still profitable and undervalued, and I think this could be a great time to invest:
Evan Calio, an energy analyst at, wrote recently that many stocks trade "near liquidation value," and the group as a whole is valued at "trough" levels, based on such measures as price to cash flow and reserves relative to enterprise value, which is stock-market value plus debt. He likes stocks that can do well "without commodity support," which is to say rising prices. His favorites include Chevron, Anadarko, and Hess.
strategist Thomas Lee is likewise bullish on energy, noting that the price ratio of energy stocks relative to the S&P 500 is near lows reached at the 2009 market bottom and during the 2010-'11 low. After those troughs, energy rallied more than 25%.
Is now a good time to invest in energy stocks that have been punished by low oil prices? Which companies look the most appealing to you?
Personally, I like Chevron (CVX). The company has boosted its dividend every year for the past 25 years, and it yields 3.3%. It's alsoat just 8.3x earnings and has $11 billion dollars in cash. Exxon (XOM) has been another long-time favorite that could provide some stability relative to the broader industry.
Investing in energy can be risky, as a company can be susceptible to volatility from swings in commodity prices that are generally out of its control. Still, the industry is inexpensive relative to historical price ratios, and more people seem to be expecting higher oil and natural gas prices in the coming months.
While the energy sector has trailed this year amid a drop in oil prices, the world is going to be heavily dependent on oil and gas for decades. That should provide plenty of profits for a range of companies in a still-growing industry.
How much of your portfolio do you dedicate to energy investments? Within this industry which group do you find most attractive: Exploration and Production like Apache? Major Integrated Oil and Gas like Exxon? Oil Services like Halliburton?
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