1 Reasonable Stock to Buy in Canada’s Expensive Energy Sector

Here’s one energy stock that stands out amidst concerns about whether the rally in the sector will continue.

| More on:
The Motley Fool

The S&P/TSX Composite Index (^OSPTX) is currently one of the top performing indices in the world, trailing only India’s BSE Sensex. The TSX has outperformed the S&P 500 so far this year, with the S&P/TSX Energy Index (^SPTTEN) playing a major role in pushing the TSX to its recent record highs. It is also the best-performing sector in the Canadian equity market with a return of more than 23% year-to-date.

However, certain areas of the TSX look a little expensive, particularly its star performer — the energy sector — which comprises roughly one-third of the Canadian stock market.

This is precisely why I am skeptical about diving into the sector. It is always a huge risk for investors to be hyper-bullish on stocks when they trade at record levels.

Higher oil prices

The climbing price of oil is one factor that is pushing the sector. The primary reason for a spike in prices is due to the unrest in Iraq. Oil prices hit a one-year high not too long ago and traders are concerned about the situation in Iraq, as the country is considered one of the world’s most significant markets for oil supply growth.

However, depending on higher oil prices to boost the sector is a risk. If we bank on oil prices to boost dividend yields, what does that do to the economy?

Influence of natural gas prices

Many investors are bullish on the sector because of soaring natural gas prices. A brutal winter increased demand and resulted in natural gas prices soaring significantly higher than they were a year ago. And although this move has resulted in its prices being more influential on the sector, natural gas prices are not likely to go much higher. Instead, they are likely to stabilize from here.

The sector is expensive

Many of the stocks in the energy sector are expensive. Enbridge (TSX: ENB)(NYSE: ENB) for example, is trading at around 80 times its trailing earnings and about 26 times its forward earnings. The company recently received conditional approval for its Northern Gateway pipeline project.

If you are trading with a short-term perspective, energy stocks are indeed expensive and now would not be the right time to buy into the market. Having said that, there is one stock that I think is a possible buy if you are determined to enter the energy space right now: Crescent Point Energy (TSX: CPG)(NYSE: CPG).

The company has a large land position in Saskatchewan and Alberta, resulting in a comfortable production growth rate of around 8% annually. Crescent Point yields about 6% and the company has kept its dividend stable at about $1.20 per share. Although the dividend rate is not likely to increase anytime soon, the company’s production is expected to grow steadily. The stock has pulled back a little and is trading at around $45 so it is an ideal time to buy, as Crescent Point is a good long-term name to hold.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Sandra Mergulhão has no positions in any of the stocks mentioned in this article.

More on Investing

food restaurants
Dividend Stocks

Better Stock to Buy Now: Tim Hortons or Starbucks?

Starbucks and Restaurant Brands International are two blue-chip dividend stocks that trade at a discount to consensus price targets.

Read more »

Diggers and trucks in a coal mine
Metals and Mining Stocks

1 Canadian Mining Stock Worth a Long-Term Investment

Cameco (TSX:CCO) stock could be a great long-term investment for Canadian growth seekers.

Read more »

Pot stocks are a riskier investment

Could Investing $10,000 in Aurora Cannabis Stock Make You a Millionaire?

Let's dive into whether Aurora Cannabis (TSX:ACB) could be a potential millionaire-maker stock, or a dud, over the long term.

Read more »

stock analysis
Energy Stocks

Is Enbridge Stock a Good Buy in May 2024?

Boasting high-yielding dividends and a stable underlying business, Enbridge (TSX:ENB) might be a great buy for your self-directed investment portfolio…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

1 Growth Stock With Legit Potential to Outperform the Market

Identifying the stocks that have outperformed the market (in the past) is relatively easy, but selecting the ones that will…

Read more »

healthcare pharma
Tech Stocks

Well Health Stock Is Up 7% After Earnings: What Investors Need to Know

Well Health is benefiting from strong demand as it digitizes healthcare and strives to improve patient outcomes.

Read more »

money cash dividends
Dividend Stocks

Passive Income: The Investment Needed to Yield $1,000 Per Annum

Do you want to generate a juicy passive-income stream? Here's a trio of stocks that can generate a yield of…

Read more »

Dividend Stocks

Here’s the Average TFSA Balance in 2024

The average TFSA balance has steadily risen over the last six years and surpassed $41,510 in 2023. Will the TFSA…

Read more »