If you want to beat the markets over the long term, you’ve got to think like a contrarian. That entails looking to areas of the market that most others wouldn’t care to. With the continued rise of renewable energy plays, the fossil fuel firms seem untouchable right now.
From the oil producers to the midstream operators, the oil stocks certainly seem like they’re on their way out. Despite their incredibly cheap multiples in an expensive market and cash flow streams that remain relatively robust, most investors would rather add such names to their blacklist.
Indeed, it’s tough to go against the grain with the stocks of firms within industries in secular decline. Mad Money host Jim Cramer thinks that the oils are in the “death knell” phase, and while it’s hard to argue with such a statement, given the profound progress of green energy plays in 2020; I question the valuations of many of such hot next-generation sustainable energy plays that aim to combat climate change.
Sure, environment social governance friendly investors are more likely to pay-up a premium price tag for stocks of firms that do their part to make the world a better place. But one must never lose sight of the price they’ll pay.
As the great Warren Buffett once said, “Price is what you pay; value is what you’ll get.”
Sever undervaluation in the top oil stocks
When it comes to oil stocks, they’re facing an uphill battle rising out of the COVID-19 crisis. That said, many of the large operators still have solid balance sheets with operations that are still gushing with cash. Moreover, one must realize that the rise of electric vehicles (EVs), renewable energy farms, and all the sort will not replace oil and gas overnight.
The transition to green energy has undoubtedly seen an acceleration in recent years, but don’t count on the major oil producers to turn off the spigot entirely anytime soon. Heck, I’d argue that there’s deep value to be had in certain oil plays and that various green energy plays (think Tesla) are in, or are close to, bubble territory.
If we are due for a rotation back to value in 2021, oil stocks could be made great again, probably at the expense of the bubbly EV and green energy plays that have seen their valuations swell to absurd heights.
Now, don’t get me wrong. I still believe that green energy is the future and that fossil fuels are in secular decline. That said, the timeline of the transition from fossil fuels to renewables has been greatly exaggerated of late.
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Two top Canadian picks to bet on the ailing energy patch
There are still many years, if not decades, worth of life to be had in fossil fuel plays. If you’re looking for value in the space, it’s tough to match oil sands behemoth Suncor Energy and pipeline kingpin TC Energy at this critical market crossroads. At the same time, they’re close to the cheapest they’ve been in recent memory.
Both firms have rock-solid balance sheets and dividend payouts (3.5% and 6.2%, respectively) that should act as more than enough of an incentive to hang in through these volatile times. With Warren Buffett’s latest vote of confidence in a nearly US$4.1 billion stake in Chevron, now is as good a time as any to take a contrarian stake in the fossil fuels, which has been oversold and are overdue for a bounce, likely in late-2021, as energy prices look to recover further.
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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 Joey Frenette 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 and recommends Tesla.