Oil companies are having a tough time. Unprecedented erosion of demand due to the pandemic and supply glut dragged oil price down and, in turn, oil stocks. While most TSX stocks and the benchmark index bounced back sharply over the past three months, shares of oil companies continue to trade low.
Take Suncor Energy (TSX:SU)(NYSE:SU) as an example. Its stock is down about 48.4% year to date, implying that if you’d invested $500 in its shares at the start of 2020, it would be worth $257.9 now. While investors lost a significant portion of their investment value, the company’s decision to cut dividends by 55% came as a big blow.
Now what
If you’re currently holding Suncor stock, you should continue to do so, as any recovery in oil prices will drive Suncor stock higher. However, investors should note that the pace of recovery could be slow, given the consistent rise in COVID-19 cases and uncertainty surrounding the economy.
With the gradual pickup in economic activities and production cut by OPEC+ nations, WTI crude continues to hover around US$40, which should help Suncor to survive and meet its operating expenses. Further, the company will also be able to cover its reduced dividend payments.
Earlier, Suncor announced that its cost-control measures have helped in reducing its breakeven price. Suncor stated that with the WTI price of US$35 per barrel, it would be able to cover all its planned expenses for 2020 and cover the dividend payments through the operating revenue.
If Suncor’s low price lures you in, think again. There are good reasons why Suncor stock is under pressure. While the operating environment remains tough, Suncor’s current valuation fails to attract. Its forward EV-to-EBITDA ratio of 8.2 is higher than the industry average of 2.4. Its price-to-cash flow ratio is well above the industry average.
Forget energy: Buy tech
With too much uncertainty and a slow pace of recovery, investors are better off buying energy stocks. I am not indicating that energy companies will not do well in the future. However, there are better investment opportunities in the tech sector, offering higher growth.
Investors can consider buying Kinaxis (TSX:KXS) stock in the tech space. Its stock has more than doubled this year. It has consistently outperformed the S&P/TSX 60 Index. Kinaxis stock has grown about 624% in five years compared to a 10% growth in the benchmark index.
The software company continues to do well irrespective of economic situations. The demand for its supply-chain management software and solutions remain elevated, driving its growth. Its strong recurring revenue base and solid order backlog indicate that it has enough ammo left that should push it stock higher. The company’s recent acquisition of Rubikloud is likely to expand its product suite and target market.
Kinaxis benefits from its ability to acquire new clients and retain them, which provides a strong base for future growth.
The continued momentum in its base business and benefits from acquisitions will accelerate its growth rate and, in turn, will drive its stock higher. Investors should note that any pullback in Kinaxis is an opportunity to buy and hold its stock for the next decade.
