Canadian investors preparing for retirement might be tempted to invest in growing oil stocks like CGX Energy (TSXV:OYL) or high-dividend oil payers like Enbridge. Here’s why you should avoid investing in this industry, permanently.
Capital-intensive investments in oil are a bad idea – period. Electric automobile manufacturers like Tesla and NFI Group (TSX:NFI) reduce society’s reliance on oil. Big Oil’s political power is waning – and with it, their ability to sustain year-over-year increases in oil demand.
Eventually, Big Oil will need to step aside and allow renewable energy to replace traditional oil completely. We are talking about advancements not only in cars, but buses, trains, and even airplanes. In the meantime, Tax-Free Savings Account (TFSA) investors should avoid betting on sustained demand in the oil sector.
Here’s an example of a risky energy company you should not buy, and a better alternative.
CGX Energy – Outdated oil exploration
CGX Energy is a TSX venture stock with a market capitalization of over $200 million, selling for under $1 per share. The firm explores for offshore oil and gas in the Guyana Suriname Basin in South America. Last reported earnings per share (EPS) stand at a positive $0.08.
Positive investor sentiment in the company had picked up around 2009 when CGX obtained a 50-year land lease on the Berbice River from the Government of Guyana. By early 2012, CGX built two offshore wells and the share price appreciated to $15. Unfortunately, the firm eventually had to abandon both projects due to low oil reserves and safety concerns.
Consequently, CGX lost 43% of its value in April 2012. This decline continued into March 2013, when CGX started to trade at around $0.80 per share. At this point, the struggling oil firm announced that it was in a precarious financial position; unless it raised further capital, it might have to shut down.
Needless to say, the company is still in operation – but TFSA investors should certainly not buy into the promise of striking rich off black gold. Instead, Canadians should look to the future and invest in emerging technologies like renewable energy stocks and electric vehicle manufacturers.
New Flyer – Electric powered transit buses
NFI Group, doing business as New Flyer, is a Canadian automobile manufacturer organized into two segments: electric vehicle manufacturing and aftermarket servicing. New Flyer is the Tesla of Canada except instead of risking its capital on the competitive consumer vehicle market, it targets public transportation.
With limited competition in this high-growth market, New Flyer has the potential to give smart TFSA investors strong dividend yields and capital gains.
Luckily, the stock just hit a massive buy signal as the market price has normalized from a speculative bubble. At the end of 2015, New Flyer’s stock price started flying from under $20 per share to nearly $60 by mid-2017. The firm maintained this price through 2018 before losing over 40% of its value in the past year.
Now that the price is less than $30 per share and issues a dividend yield of nearly 6% annually, TFSA investors should quickly purchase shares in the stock. It isn’t going anywhere despite some overreactions about optimistic earnings estimates missing their mark.
The bottom line: TFSA investors cannot go wrong by picking up stock in profitable electric vehicle producers with an annual EPS of $2.66. But, buying shares in a company that is wasting money on outdated technology like CGX or Enbridge is an obvious mistake.
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Fool contributor Debra Ray has no position in any of the stocks mentioned. David Gardner owns shares of Tesla. Tom Gardner owns shares of Tesla. The Motley Fool owns shares of Enbridge and Tesla. Enbridge, NFI Group and Tesla are recommendations of Stock Advisor.