The Motley Fool

Should Canadians Buy Energy Stocks in 2020?

Image source: Getty Images

It used to be the case that electricity generation was considered steadfastly defensive. Utilities are often included in lists of recession-proof asset types. Other members of this club included apartment REITs, consumer staples, gold producers, and some infrastructure names. Apartment REITs are a weak play in the current market; that much is clear. But utilities are fast becoming an at-risk investment theme.

The reasoning is simple. Business operations are at a historically low ebb. Entire industries have been shuttered. Manufacturing is down, and consumer demand is at an all-time low. In hindsight, investors should have seen it coming. But the best that investors can do now is to look ahead and hedge their bets. A light touch approach is called for, but cautious portfolio management should be at the top of the agenda right now.

A hot sector for disrupting companies

Bill Ackman got to the crux of the matter when he said, “It’s the virus, stupid.” That was at the depth of the market crash, when his hedging of the market was paying off. This contrarian maxim gets to the core of the matter by reminding investors that whatever happens, this market is driven by the pandemic. Even the case for greener energy is bolstered by the cleaner skies of locked-down cities.

Some areas of the energy sector are doing better than others. Hydrocarbon investing is undergoing a profound shift, for instance. Oil prices cratered this month, reaching negative prices for the first time in history. Meanwhile, clean energy is on the ascent, creating headwinds for fossil fuels and growth opportunities for shareholders.

Take BP’s split ownership of Lightsource, a global leader in solar tech. Getting into solar is a smart play for big oil producers and could become the norm. Indeed, solar is starting to go mainstream, with the Gemini project in Nevada getting the all-clear from the Trump Administration, and outfits like Heliogen eyeing scaled-up operations.

Energy stocks are showing their cyclical side

The thesis for holding Canada’s biggest oil producers isn’t quite done yet, though. Hydrocarbon producers could survive long term in innovative ways. A new technique could re-purpose oilfields for gas sequestration while leaving the carbon in the ground. There’s also nothing stopping Big Oil from getting involved in “big solar” or “big wind,” for that matter.

Names like Fortis still stand out in the energy production space, despite the threat of cheap electricity. Revenues may not be about to ramp up just yet, though, so investors should be prepared for a run of limp quarters. However, the case for buying on the cheap and holding for the long term is strengthening.

Fortis is a top name to watch, as the lockdown eases across Canada. Its bottom line is likely to begin to recover, as businesses come back online. Construction services, for instance, should see energy demand start to come back as workers return to sites. But investors should also keep an eye on the virus. Transmission rates will be a key indicator of just how viable a full economic recovery will be in 2020.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

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 Victoria Hetherington has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.