The TSX today is rising higher and higher. And it’s quite interesting, considering over the last year, we’ve seen the S&P 500 rise to all-time highs only to shrink.
While the market is, of course, a fickle beast, it could come down to the TSX today simply offering more value. Combine that with the expectation of lower interest rates, falling inflation, and some strong economic growth, then Canada is looking like a good option!
Yet there is one area of the market that’s doing well, relatively speaking. And yet, it’s one I’m not touching with a 60-foot pole.
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Energy
The energy sector, specifically oil and gas, has been doing quite well in recent months in terms of Canadian companies. This comes down to several factors. First off, there continue to be supply constraints. Since 2014, there has been a significant decrease in investment in new oil and gas exploration and production. This had led to a situation where production cannot keep up with demand.
Furthermore, there continue to be geopolitical issues in countries that produce oil. Whether it’s Russia or the Middle East, these regions continue to cause issues that disrupt supply and cause prices to rise.
What does this have to do with Canada? Canada is one of the largest producers of oil and gas in the world. The recent surge in oil prices has, therefore, given the energy market a major boost and the TSX as well, given its large weight in the index.
Why should buyers beware?
The same reasons that occurred before are still reasons to beware. First off, energy stocks continue to be highly volatile investments, influenced by geopolitical tension, regulatory changes, and fluctuations in commodity prices. Should there be peace in one country and supply rise once more, this could mean there are fewer production issues, which would lead to less demand from Canadian companies.
Furthermore, while there has yet to be a major shift over to clean energy production, even Canadian energy companies in oil and gas recognize it’s coming. This has led many long-term investors to rethink their investment in oil and gas stocks.
And they would be right to. Investors should consider the long-term viability of traditional energy companies in a landscape that is now changing and shifting. Providing instead clean energy options that will be around for the future, whereas oil and gas companies could fall away.
Avoid This TSX stock but consider another option
Given all this, despite its rising share price, I would still avoid energy stock Suncor Energy (TSX: SU). Shares of Suncor stock are up 24% in the last year alone. Meanwhile, they’ve jumped over 13% in the last month as of writing. And this just goes to show that Suncor stock remains heavily influenced by oil and gas prices rather than its bottom line.
To be fair, Suncor stock has come a long way in terms of improving its bottom line. Yet even still, Suncor stock has taken on significant debt to finance its capital-intensive projects and operations. High levels of debt can increase the company’s financial risk and interest expense, particularly during periods of economic downturns or low oil prices — something it’s seen in the past.
One to consider in this case would be Brookfield Renewable Partners (TSX: BEP.UN). BEP stock now looks heavily valuable given its share price, but also its diverse options. Whether it’s nuclear power or wind farms, it operates in them all. It is also helping countries become less dependent on outside sources for power, instead creating their own means.
What’s more, it offers a 6.14% dividend yield compared to Suncor stock’s 4.15% as of writing. So, overall, if you’re looking for value in the energy sector, BEP stock looks like a far better long-term buy over Suncor stock today.
