TSX energy stocks have been a safe haven for investors this year, with WTI (West Texas Intermediate) prices eclipsing US$120 per barrel for the first time in a long time. Undoubtedly, the price of any commodity can be wildly volatile. Momentum can reverse at the drop of a hat, as we found out back in 2020 and the earlier part of 2021, when growth stocks led the euphoric charge to incredible heights. Indeed, it seemed as though few cared about fundamentals, cash flow, or valuation. All that seemed to matter was price momentum.
These days, growth is out, with “expensive” tech plays now close to the cheapest they’ve ever been from a price-to-revenue standpoint. Taking their place are the hot energy stocks, even the ones with sub-par operations. Higher energy prices have been the tide that’s lifted all boats in the sector. With the ongoing war in Ukraine, which may not end this year, there’s a real chance that high oil could be here to stay longer than expected. This has exacerbated the inflationary environment, sparking a surge in the costs of transportation and many other input costs.
Inflation isn’t good for any firm. The great Warren Buffett stated that it “swindles” almost everyone. And he’s right. For TFSA (Tax-Free Savings Account) investors, it’s a wise idea to give the hot energy patch a second look, if not for potential gains, dividends, and growth, for a hedge against worsening inflation.
Indeed, oil is at a high point right now. You could argue that prices have nowhere to go but down. JPMorgan’s top boss Jamie Dimon opened up the possibility to US$175 per barrel of oil. That’s unprecedented. But as we all know, unprecedented times call for equally unprecedented moves in markets. The implications of such sky-high oil prices are unclear. Regardless, it could pressure many stocks at the core of your TFSA.
Many firms could feel a hit if even higher oil prices remain the new normal. That’s why it’s wise to view energy stocks as a prudent hedge. Further, I don’t suspect many energy plays have US$150-175 oil baked in, leaving the door open for a potential positive surprise down the road.
Canada’s energy kings are a great buy here
Indeed, Suncor Energy (TSX: SU)(NYSE: SU) and Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ) are the “Big Two” Canadian energy players, and they’re great buys right here. Even after doubling many times over since their 2020 bottom, they remain dirt cheap from a revenue and earnings perspective. Further, they could get much cheaper, even as shares continue their epic rally.
Currently, Canadian Natural trades at 10.75 times trailing earnings, with a 3.5% yield. As a $100 billion firm, the behemoth is Canada’s energy king. Suncor Energy is a slightly pricier energy firm, with an 11.96 times trailing earnings multiple and a 3.66% yield.
Though CNQ seems cheaper, I think Suncor has more room to run, as activists push the firm to improve upon its shortcomings. Undoubtedly, activists can make a story messy. However, if Suncor can improve its track record while oil takes off further, the stage could be set for a continuation of a rally that could see shares break new highs.
Though I’m not against owning CNQ and SU in a TFSA, Suncor seems like it could have greater upside, as activists encourage the firm to unlock its full potential.
