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Are Energy Stocks Dragging the TSX Index Down?

The past five years have been a weak time for the TSX. In a period when the S&P 500 rose 48%, the TSX returned just 12%. This is made all the more peculiar by the fact that there is no shortage of rising TSX stocks. Cannabis stocks have been on fire. Tech stocks like Shopify have outperformed many of their American peers. Clothing giant Canada Goose has been one of the best performers in its industry.

So, why the weak showing for the TSX?

The answer may have to do with one specific sector — one whose disproportionate influence on the Canadian economy has been a source of controversy for years. Not only has this industry underperformed the benchmark, but it has also created massive PR issues and legal red tape. This industry was once a massive contributor to Canadian prosperity but has since become a source of layoffs, falling earnings, and tanking portfolios.

I’m talking, of course, about energy.

Energy stock returns vs. TSX Index returns

Energy stocks have underperformed the TSX by a significant margin in the past five years. That’s important because energy stocks make up 19.3% of the entire TSX — and that doesn’t include utilities.

The fact that energy makes up such a large percentage of the Canadian economy has always been controversial. Environmentalists have bemoaned the environmental implications of the fact. Economists have complained that it leads to over-reliance on a non-service sector. And for those investing in the TSX ETFs and mutual funds, the complaint would have to be low returns. If you took energy stocks out of the TSX, the overall return in the past five years would be much higher.

Oil price madness

Part of the reason that energy stocks have been so weak recently is the fact that oil — especially Canadian crude — has been weak. In 2014, the price of Canadian Crude fell 38% from $77 to $47. In 2015, the sell-off continued, with Canadian crude hitting a low of $21. The total decline from top take to bottom take was 72%. This created a massive problem for energy companies involved in processing and selling oil.

Baytex Energy (TSX:BTE)(NYSE:BTE), for example, saw falling margins and declining net income around that time. As a result, its stock tanked 58%. Although that’s an extreme example, it goes to show the massive impact that falling oil prices had on tar sands producers.

Time for a rebound?

Now that oil prices are beginning to recover, there may be hope that a TSX energy rebound is on the way. Since November of last year, the price of Western Canadian Select has risen 214%.

This fact has some investors regaining confidence in the Canadian energy sector. Notably, Warren Buffett recently expressed interest in the industry by taking a new position in Suncor Energy (TSX:SU)(NYSE:SU). Suncor itself has been one of the best-performing Canadian energy stocks in the past half-decade, rising a modest 3%, while the sector as a whole declined in value. Whether Suncor’s newfound popularity bodes well for other energy stocks remains to be seen. Regardless, it goes to show that not all oil and gas companies are down for the count.

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Fool contributor Andrew Button has no position in any of the stocks mentioned. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Shopify and Shopify. Shopify is a recommendation of Stock Advisor Canada.

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